New Delhi: Proposed changes to insurance distribution commissions have triggered a broader debate over who would ultimately benefit if commissions are reduced — insurers, customers or the wider distribution ecosystem.
The issue remains at the consultation stage, but experts discussing the proposals have pointed to a possible mismatch between the money currently paid through insurance distribution and the level of suitability, service and claims support received by policyholders.
The debate is therefore not limited to whether insurers or distributors would save money. A key question is whether any reduction in distribution costs would eventually translate into better value and service for customers.
Focus on distributor accountability
Financial educator and author Monika Halan said the discussion should also examine the responsibility distributors take for the insurance products they sell.
She argued that agents, banks and other distributors should play a greater role in ensuring that products are suitable for customers and that policyholders receive adequate service throughout the life of a policy.
“When the distributor is the most important part of the chain, when the distributor, the agent, the bank takes responsibility for the product that it is selling, ensures suitability, ensures service and helps in the claim,” Halan said.
Her argument centres on the relationship between compensation and accountability. If distributors receive significant compensation for selling a policy, the customer should also receive meaningful support beyond the initial sale, according to the view she outlined.
What mutual funds can teach insurance
Halan also pointed to the evolution of the mutual fund industry as an example of how changes in distributor compensation do not necessarily have to undermine market growth.
She referred to the industry’s shift away from front commissions towards trail-based compensation.
According to Halan, the mutual fund industry continued to expand even after the change in its commission structure.
“The industry has thrived,” she said, suggesting that the insurance sector could similarly focus on improving the overall customer experience rather than relying primarily on high upfront incentives.
The comparison raises the possibility that a different distribution model could encourage distributors to remain engaged with customers over a longer period rather than focusing predominantly on the initial sale.
High commissions and policy persistency
CA Kanan Bahl, founder of Fingrowth Media and director of Mis-sold, linked insurance commissions with the incentives faced by distributors.
Discussing policy persistency, Bahl said the average 61-month persistency ratio for the top 10 life insurers is around 50%.
Persistency refers broadly to the extent to which policyholders continue to maintain their insurance policies over time. Low persistency can become particularly significant for customers who surrender policies during their early years, when the amount they receive may be considerably lower than the premiums they have paid.
Bahl argued that the existing commission structure could create incentives that prioritise selling policies over assessing whether a product is genuinely suitable for the customer.
“And the commissions were so high that the incentive was aligned to sell more than to look at the interest of the customer,” Bahl said.
What happens if commissions fall?
The proposed changes also raise concerns about the impact on insurance agents and businesses that have developed their operations around the existing commission structure.
A reduction in commissions could affect the economics of insurance distribution, particularly for agents and intermediaries that depend heavily on commissions as their primary source of income.
The broader question is therefore what happens to the savings created by any reduction.
If insurers retain the savings, the immediate benefit could accrue to insurance companies. If distributors absorb lower compensation while continuing to provide similar services, the impact could be felt across the distribution network.
On the other hand, if lower distribution costs eventually result in better pricing, improved products or stronger customer service, policyholders could potentially benefit.
Customer experience at the centre of debate
For Halan, the key issue is whether the insurance industry can connect distributor compensation with greater responsibility towards policyholders.
That would include ensuring that customers understand the products they are buying, assessing suitability, providing continuing service and assisting policyholders when claims arise.
The debate also highlights the difference between selling an insurance product and maintaining a long-term relationship with a policyholder.
Insurance policies can remain active for several years, making post-sale service and claims assistance important parts of the customer experience.
Efficiency versus distributor viability
The commission debate therefore involves competing considerations.
Lower commissions could reduce distribution costs, but the transition could also affect agents and intermediaries whose businesses depend on existing compensation structures.
At the same time, maintaining high commissions without corresponding improvements in suitability and service could raise concerns about whether the incentives in the system are aligned with customer interests.
Halan argued that greater distributor accountability, combined with the efficient use of savings generated from any changes, could strengthen the insurance market.
The central question is ultimately where the efficiency gains from lower commissions go — and whether they translate into greater value for policyholders.
With the proposals still at the consultation stage, the eventual impact will depend on the final rules and how insurers, distributors and regulators implement them.