The Department of Financial services (DFS) has sent letters to general insurers and life insurers through their respective councils- General Insurance Council and Life Insurance Council- after both- the insurance regulator IRDAI and the banking regulator Reserve Bank of India- have found that the insurers, particularly private sector life and general insurers(including stand alone health insurers(SAHIs) have paid substantial higher commission without growing their overall business

New Delhi:The insurers are getting cornered from all fronts for their misconduct on the issue of paying excessive distribution commission.

Even as the insurance regulator IRDAI is working on new set of rules on distribution commission, swinging into action, the Department of Financial services has now initiated probes against insurers misconduct of paying excessive commission to various intermediaries without growing their business proportionately in FY 25.

In a bid to investigate the matter threadbare, the DFS has sent letters to general insurers and life insurers asking their explanantion as to why they have paid so much of excessive distribution commissions without expanding their business in terms of premium and policies.

The letters have been sent to two official represetative bodies- General Insurance Council and Life Insurance Council- after both, the insurance regulator IRDAI and the banking regulator Reserve Bank of India, have found that the insurers, particularly private sector life and general insurers(including stand alone health insurers(SAHIs) have paid substantial higher commission without growing their overall business.

“The insurers have been asked to reply as soon as possible. Let us see how the insurers are justifying their acts of paying higher commissions and its modus operandi. We will deal with the situation accordingly,’’ said sources in the DFS.

Earlier, both-M Nagaraju, secretary, DFS, and Ajay Seth, chairman, IRDAI- had expressed concern over the issue of payment of higher commission in the insurance sector and had hinted at framing of new regulations to ensure that commissions remain within reasonable limits and do not make insurance products costly and unaffordable.

A distinct divergence in cost efficiency is evident between public and private life insurers, said the RBI in its latest Financial Stability Report(FSR).

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, said RBI in its Financial Stability Report released on Wednesday.

Similarly, 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.