Commission expenses and operating expenses constitute a major part of the total expenses of the general insurance industry, said the IRDAI in its annual report of 2024-25
For the life insurance sector, total commission outgo increased by 18 per cent (whereas the total premium growth 6.73 per cent) during 2024-25 as compared to the previous year,said the report.
Hyderabad/Mumbai:IRDAI chairman Ajay Seth’s concern that a section of insurers are paying unhealthy level of distribution commissions to various intermediaries to procure business, impacting the sustainable growth of the industry, and have to be curbed without fail in the larger interest of the sector, seems to be now supported by the insurance regulator’s official data and Financial Stability Report of the Reserve Bank of India(RBI).
Both the regulators have pointed fingers towards private sector insurers for paying higher commission to solicit their business and derailing the growth agenda.
Commission expenses and operating expenses constitute a major part of the total expenses of the general insurance industry, said the IRDAI in its annual report of FY 2024-25 released on Tuesday.
The banking regulator RBI also has echoed the IRDAI’s stand,rather more vocierously, in its latest Financial Stability Report (FSB) released on Wednesday.
According to the report, a meaningful expansion of coverage is also constrained by the high expense structures. With high distribution costs embedded in pricing,affordability is reduced, leading to a divergence between insurance density and penetration. Growth largely reflects higher spending by existing policyholders rather than a broadening of the insured base.
In the life insurance sector, the RBI has pointed out a distinct divergence in cost efficiency is evident between public and private life insurers.
In the Indian non-life sector, public insurers demonstrate a stable but high expense base. While their premiums have grown steadily, operating expenses spiked in 2022-23 before moderating,and commission costs have remained low and flat reflecting their reliance on established, lower-cost distribution channels,said the RBI.
Conversely, private nonlife insurers exhibit a more aggressive cost-growth dynamic. Their commission expenses have escalated sharply. This points to a high-cost distribution-led growth strategy, potentially impacting underwriting margins, added the RBI.
For the life insurance sector, total commission outgo increased by 18 per cent (whereas the total premium growth 6.73 per cent) during FY2024-25 as compared to the previous year,revealed the IRDAI report.
According to the data provided by the IRDAI in its FY2024-25 annual report, the private sector general insurers including including stand alone health insurers ( SAHIs) have paid almost 19 per cent of their premium as commission while PSU general insurers have paid around 10 per cent as commission for soliciting their business during the year.
The PSU multiline general insurers have increased their premium by 5.54 per cent from Rs 90,252 crore in 2023-24 to Rs 95,252 crore in FY 2024-25 while private sector insurers (including SAHIs) have underwritten Rs2.01 lakh crore as against Rs 1.88 lakh crore in 2023-24.
The gross commission expenses of public sector general insurers, private general insurers,standalone health insurers and specialized insurers stood at Rs9,335 crore, Rs30,498 crore, Rs 7,365 crore and Rs67 crore respectively for 2024-25.
The general insurance industry cumulatively amounting to a total gross commission expense of Rs47,266 crore which is almost 15 per cent of for the entire non-life insurance premium in 2024-25
The operating expenses of nonlife insurers stood at Rs 37,811 crore in 2024-25 as against Rs38,653 crore in 2023-24, showing an overall decrease of 2.18 percent. The operating expenses of public sector general insurers, private general insurers, standalone health insurers and specialized insurers stood at Rs 12,575 crore, Rs18,179 crore, Rs 6,218 crore and Rs `840 crore respectively for 2024-25.
According to the annual report, during the financial year FY 2024-25, 15 nonlife insurers were non-compliant with the limits pertaining to Expenses of Management(EoM) and their request for forbearance is under examination.
Out of all non-life insurers, 26 private insurers (including SAHIs) reported an increase in premium underwritten as compared to the previous year.The specialized insurers underwrote gross direct premium amounting to Rs 11,108 crore in 2024-25.
The public sector general insurers together contributed to 34.57 per cent of the market share while the private sector general insurers contributed to the remaining 65.43 per cent.
The IRDAI regulations, since Apr 1, 2024, allowed general insurers to incur EoM up to 30 per cent and standalone health insurers to incur up to 35 per cent of gross premium in India in the preceding financial year. By introducing a single limit, basis the total gross premium of the general and health insurer, the new regime had removed the ealier segmental product-based calculation of allowable limits.
Life Insurance
According to the RBI, public life insurers show a strong focus on expense management and potentially lower acquisition costs underlined by flat commission structure despite growing premiums.
In contrast, private life insurers show a steep increase in commission pay-outs particularly surging from 2022-23 onwards indicating business acquisition at higher marginal cost. Their operating expenses have also remained higher and sticky,cautioned RBI.
The IRDAI report showed, during FY2024-25, life insurers paid a total amount of Rs 60,800 crore as commission. The commission expenses ratio (commission expenses expressed as a percentage of premium) slightly increased to 6.86 per cent in 2024-25 from 6.21 per cent in 2023-24.
Further, total commission outgo increased by 18 per cent (total premium growth 6.73 per cent) during 2024-25 as compared to the previous year, as per the RBI report.
However, the operating expenses of the life insurers decreased by 13.14 per cent to `77,342 crore in 2024-25 and the operating expenses ratio (operating expenses as per cent of gross premium underwritten) of the life insurance industry decreased from 10.73 per cent in 2023-24 to 8.73 per cent in 2024-25.
IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024 prescribe the allowable limits of expenses of management taking into account, inter alia, the type and nature of product, premium paying term and duration of insurance business.
During the year 2024-25, out of 25 life insurers in operation, 17 were compliant with the aforementioned regulations.
Eight life insurers had exceeded the limits of expenses on an overall basis in Par/Non-Par (including Linked) business.The life insurance industry reported gross expenses of management of `1.38 lakh crore during 2024-25,which was 15.60 percent of total gross premium.
Reserve Bank of India
According to the RBI, a distinct divergence in cost efficiency is evident between public and private life insurers.
Public life insurers show a strong focus on expense management and potentially lower acquisition costs underlined by flat commission structure despite growing premiums.
In contrast, private life insurers show a steep increase in commission pay-outs particularly surging from 2022-23 onwards indicating business acquisition at higher marginal cost. Their operating expenses have also remained higher and sticky.
The RBI further said in the non-life sector, public insurers demonstrate a stable but high expense base. While their premiums have grown steadily, operating expenses spiked in 2022-23 before moderating,and commission costs have remained low and flat reflecting their reliance on established, lower-cost distribution channels.
Conversely, private nonlife insurers exhibit a more aggressive cost-growth dynamic. Their commission expenses have escalated sharply. This points to a high-cost distribution-led growth strategy, potentially impacting underwriting margins.