The hidden cost of insurance distribution

India’s life insurance industry paid ₹60,799 crore in commissions in FY2025. By itself, the figure is not extraordinary for a sector of this scale. What should alarm regulators and policymakers is the trend. In a single year, commission payouts surged 18% while premium growth managed only 6.7%. Distribution costs are now rising nearly three times faster than the business they are meant to support. The Reserve Bank of India (RBI) has expressed concern about this divergence in its Financial Stability Report (December 2025).

Public insurers show better cost discipline, while several private insurers — especially after 2022-23 — exhibit steeper commission escalation. For policyholders, this divergence is not theoretical. Over the life of a typical policy, it translates into tens of thousands of rupees of foregone value — not because of fraud or misconduct, but because of how bargaining power is concentrated across certain distribution channels.

Public and private insurance divergence

FY2025 data reveal something more fundamental than headline cost inflation — an exposure of a structural bifurcation. The Life Insurance Corporation of India (LIC), which sources nearly 95% of its business through its agency force, saw its commission ratio decline from 5.45% to 5.17% despite modest premium growth of 2.8%. In contrast, insurers heavily dependent on alternate channels — bancassurance, brokers, insurance marketing firms — saw commission ratios rise sharply from 7.21% to 8.95%, a 174-basis-point jump in a single year. Commission expenditure by private insurers surged 38.8%, from ₹25,564 crore to ₹35,491 crore.

The LIC and a few listed private insurers exhibit better cost control, while others show steep increases, pulling up private-sector averages. This 202-basis-point divergence between public and private life insurers — operating under identical regulations, selling similar products, and competing for the same customers — can largely be explained by two variables: channel composition and the share of single-premium versus non-single-premium business. Insurers with an agency-dominated model display cost discipline; those reliant on alternate channels show cost escalation. This is not correlation — it is structural causation.

The explanation lies in bargaining power. Twenty-six life insurers compete for partnerships with banks controlling over 4,00,000 branches. Banks can reallocate business, switch insurer partners, or adjust shelf space with relative ease. Insurers face high switching costs: building alternate distribution at scale requires years and substantial capital. The outcome is predictable — pricing power concentrates with distribution intermediaries, and commission inflation follows.

Markets respond to incentives, not intent. Historically, the Insurance Regulatory and Development Authority of India (IRDAI) imposed product-wise commission caps, limiting payouts regardless of channel. When hard caps existed, competitive pressure surfaced through marketing arrangements, technology fees, training programmes and infrastructure support. Many of these are legitimate. Concern arises when scale and timing mirror sales volumes rather than services delivered. This is not a compliance failure; it is the natural outcome of competition interacting with concentrated distribution power.

Unchanged economics

The shift in 2023-24 to the Expenses of Management (EOM) framework was well-intentioned. It aimed to encourage managerial autonomy, efficiency and accountability. However, expenses earlier embedded elsewhere have now surfaced transparently as commissions. Institutions with bargaining power have become more assertive in demanding higher payouts. Visibility has improved, but underlying economics remain unchanged.

Therefore, blaming individual agents misses the point entirely. After sourcing costs, taxes, overrides and institutional deductions, agents retain perhaps 35%-40% of headline commissions. The bulk — nearly ₹26,000 crore in FY2025 — accrues to corporate intermediaries, particularly banks and insurance marketing firms, which command customer access at scale. This is a market-structure issue, not an agent-conduct issue.

Several popular remedies fail to address this reality. Clawbacks make intermediary cash flows uncertain, encouraging risk aversion and exit from insurance distribution, ultimately harming penetration. Commission disclosure offers limited benefit to most buyers while incentivising informal rebates that push transactions outside regulatory visibility. Open architecture, often positioned as pro-competition, risks worsening outcomes by eroding insurers’ incentives to invest in agent capability and service — mirroring the mutual fund industry’s post-2012 experience.

Distribution economics cannot be corrected through disclosure or accounting reclassification alone. The issue runs deeper in incentive design and bargaining power.

A way out

What would help is rebalancing commissions away from extreme front-loading toward meaningful renewal income, so that servicing and persistency matter as much as sales. Bancassurance requires explicit joint oversight by the RBI and IRDAI, focusing on persistency, complaints, servicing quality and commissions — not just headline expense ratios. EOM limits must recognise channel economics while ensuring that acquisition costs remain within reasonable bounds. Above all, regulation should pivot toward outcomes — retention, service satisfaction and claims experience rather than process compliance.

Insurance penetration has already softened, declining from 4% to 3.7% of GDP in FY2024. If distribution costs continue to rise faster than value delivered, insurance will steadily lose relevance for middle-income households.

Containing acquisition costs within rational limits is not optional. It is essential for sustainable penetration, a concern rightly flagged by the RBI.

T.C. Suseel Kumar is a former Managing Director of the Life Insurance Corporation of India. R. Sudhakar is a former Executive Director – Marketing of the Life Insurance Corporation of India

Published – February 13, 2026 12:08 am IST