The Hidden Cost of Insurance Distribution in India

Q: What does the recent surge in commission payouts in India’s life insurance sector indicate about the underlying market structure?

Emerging structural imbalance:The sharp rise in commission payouts — ₹60,799 crore in FY2025, growing 18% against premium growth of just 6.7% — signals a structural distortion rather than a routine cost increase. Distribution expenses rising nearly three times faster than business growth indicate that bargaining power within the insurance ecosystem is unevenly distributed. This is not merely inflationary pressure; it reflects a shift in how value is allocated between insurers and intermediaries.Channel composition as a determinant:Data show a clear divergence between public and private insurers. LIC, heavily reliant on an agency model, reduced its commission ratio from 5.45% to 5.17%. In contrast, private insurers dependent on bancassurance and brokers saw commission ratios rise sharply to 8.95%. This suggests that distribution channel concentration — particularly bank-led distribution — plays a decisive role in cost escalation.Implications:The issue is structural causation, not misconduct. Twenty-six insurers compete for partnerships with banks controlling over 4 lakh branches. Banks possess switching power, while insurers face high entry and scaling costs. As a result, pricing power concentrates with intermediaries, leading to commission inflation that ultimately impacts policyholder value.

Q: Why is rising commission expenditure a matter of regulatory and financial stability concern?

Erosion of policyholder value:Higher commissions directly reduce the long-term returns of policyholders. Over a typical policy tenure, elevated acquisition costs can translate into significant foregone value. While not illegal, this redistribution of value raises questions about fairness and efficiency in financial intermediation.Macro-financial implications:The RBI’s concern stems from systemic risk considerations. If acquisition costs continue rising faster than premium growth, insurers’ profitability and capital adequacy may come under strain. Moreover, insurance penetration has declined from 4% to 3.7% of GDP, suggesting that rising costs may be undermining affordability and long-term sectoral sustainability.Financial inclusion dimension:Life insurance is a critical pillar of household financial security. If distribution costs inflate premiums without improving service or claims quality, middle-income households may exit the market, weakening India’s risk-pooling ecosystem.

Q: How did the shift to the Expenses of Management (EOM) framework alter transparency without fundamentally changing distribution economics?

Intent of reform:The EOM framework introduced in 2023-24 replaced product-level commission caps with overall expense ceilings, aiming to provide managerial flexibility and encourage efficiency. It sought to move from rigid compliance to outcome-based supervision.Transparency versus incentives:While the reform improved visibility of expenses, it did not alter underlying bargaining dynamics. Expenses previously embedded under marketing support, training fees, or infrastructure payments now appear transparently as commissions. Institutions with scale — especially banks — have leveraged this flexibility to negotiate higher payouts.Policy lesson:Regulatory reclassification alone cannot correct structural market power imbalances. Without addressing incentive design and concentration in distribution channels, transparency reforms may simply reveal, rather than resolve, cost escalation.

Q: Critically evaluate whether measures like commission disclosure, clawbacks, and open architecture can effectively address rising acquisition costs.

Commission disclosure:While transparency is normatively desirable, most policyholders lack the technical capacity to assess commission structures. Disclosure may incentivise informal rebates, pushing transactions outside regulatory oversight, thereby increasing opacity rather than reducing it.Clawbacks and open architecture:Clawbacks create cash flow uncertainty for intermediaries, potentially discouraging participation and reducing insurance penetration. Open architecture — allowing banks to distribute multiple insurers — may intensify competition for shelf space, further strengthening banks’ bargaining power, similar to the mutual fund industry post-2012.Conclusion:These remedies treat symptoms rather than causes. The core issue is concentrated distribution power. Sustainable reform requires rebalancing incentives, particularly reducing extreme front-loading of commissions and strengthening renewal-based income linked to persistency and service quality.

Q: Using LIC and private insurers as a comparative case study, what insights can be drawn about distribution models and cost discipline?

LIC’s agency-led model:LIC sources nearly 95% of its business through individual agents. Despite modest premium growth of 2.8%, it reduced its commission ratio, reflecting tighter cost discipline and relatively balanced bargaining power within its distribution network.Private insurers’ bancassurance dependence:Private insurers relying heavily on banks experienced a 38.8% surge in commission expenditure. Banks’ control over customer access and ability to switch insurer partnerships grant them significant negotiating leverage. This structural asymmetry explains the 202-basis-point divergence between public and private insurers.Key takeaway:Identical regulation does not yield identical outcomes when channel economics differ. Distribution architecture fundamentally shapes cost behaviour. Policymakers must therefore evaluate sectoral health not just through regulatory design, but through market structure analysis.

Q: What are the long-term implications of rising distribution costs for insurance penetration and financial inclusion in India?

Declining penetration trends:Insurance penetration has already fallen from 4% to 3.7% of GDP. If acquisition costs continue escalating, insurers may either raise premiums or compress benefits, both of which reduce product attractiveness for middle-income households.Impact on risk pooling:Life insurance functions as a social risk-sharing mechanism. When cost inefficiencies erode value, households may prefer informal savings or short-term instruments, weakening long-term protection coverage and undermining social security objectives.Way forward:Regulation must pivot toward outcome metrics such as persistency ratios, claims settlement quality, and customer satisfaction. Rebalancing commissions toward renewal income and strengthening joint RBI–IRDAI oversight of bancassurance can help align incentives with sustainable penetration goals.

Understanding the alarming trend in life insurance commissions and its impact on policyholders and the insurance landscape.

pocketias team

•February 13, 2026•5 mins read

Rising insurance commissions outpace premium growth, alarming regulators

Not Started

Rising Commissions in India’s Life Insurance Sector Structural Concerns and Regulatory Implications

1. Context: Divergence Between Commission Growth and Premium Growth

India’s life insurance industry paid ₹60,799 crore in commissions in FY2025. While large in absolute terms, the figure becomes significant when viewed against business growth trends.

Commission payouts grew by 18%, whereas premium growth stood at only 6.7%. Distribution costs are thus rising nearly three times faster than the underlying business. The Reserve Bank of India (RBI), in its Financial Stability Report (December 2025), flagged concerns regarding this divergence.

This widening gap signals rising acquisition costs, which ultimately reduce policyholder value and weaken long-term insurance penetration if left unaddressed.

When distribution costs grow faster than premium income, value shifts from policyholders to intermediaries, weakening financial inclusion and long-term sector sustainability.

2. Structural Divergence: Public vs Private Insurers

FY2025 data reveal a structural bifurcation between public and private insurers rather than mere cost inflation.

LIC, which sources nearly 95% of its business through its agency network, reduced its commission ratio from 5.45% to 5.17%, despite modest premium growth of 2.8%. In contrast, private insurers reliant on alternate channels saw commission ratios rise from 7.21% to 8.95%, a 174-basis-point increase in one year.

Private insurers’ commission expenditure surged 38.8%, from ₹25,564 crore to ₹35,491 crore. The divergence between public and private insurers reached 202 basis points, despite operating under identical regulations and selling similar products.

Key Statistics:

Total commissions (FY2025): ₹60,799 crore
Commission growth: 18%
Premium growth: 6.7%
Private insurer commission surge: 38.8%
Commission ratio jump (private): 174 basis points
Divergence (public vs private): 202 basis points

The variation is linked not to regulation but to channel composition — insurers dependent on alternate channels face structurally higher bargaining pressures.

3. Channel Composition and Bargaining Power

The divergence arises primarily from distribution channel economics. LIC’s agency-dominated model shows cost discipline, whereas insurers reliant on bancassurance, brokers and insurance marketing firms display cost escalation.

India has 26 life insurers competing for partnerships with banks controlling over 4,00,000 branches. Banks possess significant bargaining leverage: they can shift insurer partnerships, adjust shelf space or reallocate business with relative ease.

Insurers, however, face high switching costs in building alternative distribution networks. This imbalance concentrates pricing power with distribution intermediaries, resulting in commission inflation.

Insurance markets respond to incentive structures. When distribution is concentrated, bargaining power shifts to intermediaries, driving higher acquisition costs irrespective of regulatory intent.

4. Regulatory Evolution: From Commission Caps to EOM Framework

Historically, the Insurance Regulatory and Development Authority of India (IRDAI) imposed product-wise commission caps, limiting payouts across channels. Competitive pressures then manifested through marketing arrangements, technology fees and infrastructure support.

In 2023-24, IRDAI transitioned to the Expenses of Management (EOM) framework. The reform aimed to enhance managerial autonomy and transparency by setting overall expense limits rather than product-level caps.

While visibility improved, underlying economic incentives remained unchanged. Institutions with bargaining power became more assertive in demanding higher payouts, leading to expense reclassification rather than structural correction.

Regulatory transparency improves accounting clarity but cannot alter market structure unless incentive asymmetries are addressed.

5. Who Gains? Agents vs Corporate Intermediaries

The narrative often attributes rising commissions to agents. However, after deducting sourcing costs, taxes and overrides, agents retain only 35%-40% of headline commissions.

Nearly ₹26,000 crore in FY2025 accrued to corporate intermediaries — particularly banks and insurance marketing firms that control large-scale customer access.

This indicates that the issue is structural and relates to market power concentration rather than agent misconduct.

Misdiagnosing the problem as agent-level conduct obscures deeper distribution economics and may lead to ineffective policy responses.

6. Limits of Popular Remedies

Several commonly suggested solutions fail to address core structural incentives:

Clawbacks:

Increase cash-flow uncertainty for intermediaries
May reduce participation in insurance distribution

Commission disclosure:

Limited utility for most retail buyers
Risk of informal rebate practices outside regulatory oversight

Open architecture:

May weaken insurers’ incentives to invest in agent capability
Mirrors post-2012 mutual fund distribution challenges

These measures address symptoms rather than bargaining asymmetry.

Without redesigning incentive structures, disclosure or accounting reforms cannot sustainably contain acquisition costs.

7. Impact on Insurance Penetration and Financial Stability

Insurance penetration declined from 4% to 3.7% of GDP in FY2024. Rising distribution costs reduce policy value and may deter middle-income households from purchasing or renewing policies.

Higher acquisition costs can also distort product design toward front-loaded commission structures rather than long-term service quality.

This trend has macroeconomic implications, as insurance penetration supports household financial security and long-term capital formation.

“Financial stability is a public good.” — Reserve Bank of India

If acquisition costs continue to rise unchecked, insurance may lose affordability and relevance, weakening both household risk protection and financial system depth.

8. Way Forward: Rebalancing Incentives and Regulatory Focus

Sustainable correction requires structural rebalancing rather than punitive measures.

Policy Measures:

Shift commissions away from extreme front-loading toward renewal income
Strengthen joint RBI–IRDAI oversight of bancassurance
Monitor persistency, complaints and servicing quality
Align EOM limits with realistic channel economics
Regulate toward outcomes (retention, claims experience) rather than process compliance

Reforms must balance insurer viability, intermediary incentives and consumer protection.

Aligning commissions with long-term policy servicing incentivises persistency and enhances value for policyholders, thereby supporting sustainable penetration.

Conclusion

The rise in life insurance commissions in FY2025 reflects deeper structural issues in distribution economics rather than isolated compliance failures. The divergence between premium growth and commission payouts, combined with declining insurance penetration, signals the need for calibrated regulatory intervention.

Ensuring rational acquisition costs, balanced bargaining power and outcome-oriented supervision is essential for sustaining insurance penetration and strengthening India’s financial stability architecture.

Quick Q&A

Everything you need to know

Emerging structural imbalance:
The sharp rise in commission payouts — ₹60,799 crore in FY2025, growing 18% against premium growth of just 6.7% — signals a structural distortion rather than a routine cost increase. Distribution expenses rising nearly three times faster than business growth indicate that bargaining power within the insurance ecosystem is unevenly distributed. This is not merely inflationary pressure; it reflects a shift in how value is allocated between insurers and intermediaries.

Channel composition as a determinant:
Data show a clear divergence between public and private insurers. LIC, heavily reliant on an agency model, reduced its commission ratio from 5.45% to 5.17%. In contrast, private insurers dependent on bancassurance and brokers saw commission ratios rise sharply to 8.95%. This suggests that distribution channel concentration — particularly bank-led distribution — plays a decisive role in cost escalation.

Implications:
The issue is structural causation, not misconduct. Twenty-six insurers compete for partnerships with banks controlling over 4 lakh branches. Banks possess switching power, while insurers face high entry and scaling costs. As a result, pricing power concentrates with intermediaries, leading to commission inflation that ultimately impacts policyholder value.

Erosion of policyholder value:
Higher commissions directly reduce the long-term returns of policyholders. Over a typical policy tenure, elevated acquisition costs can translate into significant foregone value. While not illegal, this redistribution of value raises questions about fairness and efficiency in financial intermediation.

Macro-financial implications:
The RBI’s concern stems from systemic risk considerations. If acquisition costs continue rising faster than premium growth, insurers’ profitability and capital adequacy may come under strain. Moreover, insurance penetration has declined from 4% to 3.7% of GDP, suggesting that rising costs may be undermining affordability and long-term sectoral sustainability.

Financial inclusion dimension:
Life insurance is a critical pillar of household financial security. If distribution costs inflate premiums without improving service or claims quality, middle-income households may exit the market, weakening India’s risk-pooling ecosystem.

Intent of reform:
The EOM framework introduced in 2023-24 replaced product-level commission caps with overall expense ceilings, aiming to provide managerial flexibility and encourage efficiency. It sought to move from rigid compliance to outcome-based supervision.

Transparency versus incentives:
While the reform improved visibility of expenses, it did not alter underlying bargaining dynamics. Expenses previously embedded under marketing support, training fees, or infrastructure payments now appear transparently as commissions. Institutions with scale — especially banks — have leveraged this flexibility to negotiate higher payouts.

Policy lesson:
Regulatory reclassification alone cannot correct structural market power imbalances. Without addressing incentive design and concentration in distribution channels, transparency reforms may simply reveal, rather than resolve, cost escalation.

Commission disclosure:
While transparency is normatively desirable, most policyholders lack the technical capacity to assess commission structures. Disclosure may incentivise informal rebates, pushing transactions outside regulatory oversight, thereby increasing opacity rather than reducing it.

Clawbacks and open architecture:
Clawbacks create cash flow uncertainty for intermediaries, potentially discouraging participation and reducing insurance penetration. Open architecture — allowing banks to distribute multiple insurers — may intensify competition for shelf space, further strengthening banks’ bargaining power, similar to the mutual fund industry post-2012.

Conclusion:
These remedies treat symptoms rather than causes. The core issue is concentrated distribution power. Sustainable reform requires rebalancing incentives, particularly reducing extreme front-loading of commissions and strengthening renewal-based income linked to persistency and service quality.

LIC’s agency-led model:
LIC sources nearly 95% of its business through individual agents. Despite modest premium growth of 2.8%, it reduced its commission ratio, reflecting tighter cost discipline and relatively balanced bargaining power within its distribution network.

Private insurers’ bancassurance dependence:
Private insurers relying heavily on banks experienced a 38.8% surge in commission expenditure. Banks’ control over customer access and ability to switch insurer partnerships grant them significant negotiating leverage. This structural asymmetry explains the 202-basis-point divergence between public and private insurers.

Key takeaway:
Identical regulation does not yield identical outcomes when channel economics differ. Distribution architecture fundamentally shapes cost behaviour. Policymakers must therefore evaluate sectoral health not just through regulatory design, but through market structure analysis.

Declining penetration trends:
Insurance penetration has already fallen from 4% to 3.7% of GDP. If acquisition costs continue escalating, insurers may either raise premiums or compress benefits, both of which reduce product attractiveness for middle-income households.

Impact on risk pooling:
Life insurance functions as a social risk-sharing mechanism. When cost inefficiencies erode value, households may prefer informal savings or short-term instruments, weakening long-term protection coverage and undermining social security objectives.

Way forward:
Regulation must pivot toward outcome metrics such as persistency ratios, claims settlement quality, and customer satisfaction. Rebalancing commissions toward renewal income and strengthening joint RBI–IRDAI oversight of bancassurance can help align incentives with sustainable penetration goals.