The main question for customers when purchasing an insurance policy is what level of coverage they receive for a certain premium amount. However, this price includes not only the insurance risk but also costs for selling the policy, paying commissions, and servicing. In this regard, the Insurance Regulatory and Development Authority of India (IRDAI) has proposed significant changes regarding these expenses. A natural question arises: will the reduction in company and distributor costs lead to a direct decrease in prices for consumers?
Will the premium decrease if commissions are reduced?
The IRDAI consultation document proposes setting strict limits on the expenses of insurance companies and the commission rewards of distributors. The regulator notes that a significant portion of insurance expenses is spent on attracting and delivering policies to customers. Excessive commissions and multiple distribution levels can increase the overall cost of insurance. Nevertheless, experts warn that reducing commissions does not guarantee an immediate proportional decrease in the premium. According to specialists, companies may redirect the freed-up funds to other needs, such as technology, claims processing, underwriting, and customer service.
What is the EoM limit in life insurance?
IRDAI proposes linking the Expense of Management (EoM) limit for life insurance companies to the Gross Direct Premium Income (GDPI) at the company level. Under the proposal, this limit can be reduced to 15% within two years and to 12.5% within five years. For some companies already below the proposed limit, a long-term target of 10% within five years has been set. This means that companies will have to gradually reduce their expenses for conducting and selling insurance relative to their income.
The calculation will also change in general insurance
The proposal also concerns changing the basis for calculating EoM for general insurance companies. Currently, Gross Written Premium (GWP) is used, but now it is proposed to link it to internal GDPI. It is planned to reduce the EoM limit to 20% within five years, with a transitional level of 25% proposed for the two-year period. Furthermore, separate commission limits are planned based on the specific insurance product and distribution channel, which will eliminate a one-size-fits-all approach to commissions for all policies.
How much cheaper could the premium become?
This aspect requires caution from the customer. According to Indranil Chatterjee from InsuranceDekho, expense restrictions may create potential for premium reductions, but it remains uncertain what portion of this saving will reach customers. The outcome will depend on the type of product, policy cost, distribution channel, and customer segment. Shilpa Arora from Insurance Samadhan also notes that reducing commissions itself will not automatically lead to a premium reduction; initial costs for creating new distribution channels may arise, and the benefit may only appear in the long run.
Where will the remaining funds go?
Saurab Vijargi from CoverSure believes that commission is only a part of the total expenses of insurance companies. Companies are also forced to spend money on technology, policy servicing, claims processing, ensuring transparency, and providing necessary information. Therefore, funds freed up in distribution may be directed towards improving other services, and this does not necessarily reflect an immediate reduction in the premium for the customer. Indranil Chatterjee agrees that companies can use some savings to strengthen technology, underwriting, claims processing, and customer service.
How will this affect buyers of small policies?
Another side of the proposal emerges here. If distributors receive less income from low-cost policies, they may focus on more expensive products. There is a concern that this could affect the availability of inexpensive insurance and its distribution in small towns. Shilpa Arora emphasizes that the role of distribution in insurance is very important, so changes in commissions may affect not only companies but also the ways policies are delivered to customers. Saurab Vijargi points out that in health insurance, there are aspects such as riders, add-ons, exclusions, and co-payment, which maintains the need for a distribution network to explain the policy to the customer. Similarly, this applies to complex and long-term life insurance products.
It is necessary to look beyond just the price when buying a policy
When purchasing or renewing a policy, one cannot make a decision based solely on whether the premium has decreased. It is crucial to consider the policy coverage, exclusions, claims support, service and renewal terms. It is also necessary to compare the prices and coverage of different insurers. Indranil Chatterjee advises customers to pay attention to coverage, exclusions, pricing, insurer choice, possibility of bundling with loans or other financial products, and claims support. Thus, even if the premium decreases, one must ensure that the coverage or service has not deteriorated.