Stories
IRDAI Flags Soaring Insurance Costs, Commissions: Policyholders Bear the Brunt
- •IRDAI Chairman Ajay Seth highlighted surging commission rates and high business costs in the insurance sector, aiming to correct these issues through recent policy reforms.
- •Seth noted that market conduct has not aligned with policyholder interests, leading to significant workarounds and higher total costs, even after regulatory limit removals in 2023.
- •The cost of doing business for life insurance climbed from 16.5% in FY21 to 22%, while general insurance costs rose from 26% to 32%.
- •Distributor margins have sharply increased, with one large distributor generating a 44% post-tax profit on commission income, and commission rates for some distributors jumping from 8% to 24% or even 6-7% to 38%.
- •Seth stated there is no economic rationale for a Managing General Agent (MGA) framework in the domestic market currently, emphasizing the need for higher market conduct, corporate governance, and transparency first.
Key Questions Answered
IRDAI Chairman Ajay Seth highlighted that commission rates and operating costs in the insurance sector have surged significantly over the past two to three years, citing instances where distributor commissions jumped from single digits to as high as 38 percent or even 24 percent. He noted that these escalating expenses indicate market conduct has not been aligned with policyholder interests.
For the life insurance industry, the cost of doing business rose from 16.5 percent in FY21 back up to 22 percent, while general insurance costs climbed to 32 percent after stabilizing around 26 percent between FY17 and FY19. Some established companies and older players are operating with costs exceeding 25 to 30 percent.
IRDAI Chairman Ajay Seth stated that the Managing General Agent (MGA) concept is primarily intended for foreign insurers wanting a presence in the GIFT IFSC, and he currently sees no economic rationale for an MGA framework in the domestic market. He emphasized that corporate governance, market conduct, and transparency must reach a much higher order before even considering the relevance of MGA locally.
