On a very rainy day in September 2005, I somehow stumbled into business journalism.

I was hired to write on personal finance – without knowing anything about the subject. Those were simpler times.

One of the first things I realised was how insurance companies were taking people for a ride by paying extremely high commissions to insurance agents – money policyholders were actually paying for through their premiums.

This was low-hanging fruit for a personal finance writer and I started writing extensively about it.

One of my central contentions was that the Hyderabad-headquartered insurance regulator – Insurance Regulatory and Development Authority of India, or IRDAI – was behaving more like a lobby than a regulator. 

Not surprisingly, very soon the insurance companies and their brand managers came complaining, almost resulting in a fist fight with one. But that’s another story for another day. 

The sorry thing is that two decades later, the situation doesn’t seem to have improved. IRDAI continues to behave more like a lobby than an insurance regulator. Indeed, a recently published IRDAI public consultation paper shows us just that.

It makes the following points. 

1) Over a two-year period – from 2022-23 to 2024-25 – the new business premium of life insurance companies procured through corporate agents grew 28%. During the same period the total distributor remuneration grew 125%. The new business premium consists of the first-year premium of insurance policies, along with the premium paid towards single-premium policies. 

2) Distributor remuneration now accounts for nearly 27% of the first-year premium. There are rewards and incentives over and above this, adding 30% to 60% over the base commission.

3) Effective pay-outs on unit-linked insurance plans range from around 5% to nearly 40%. Ulips are structured like mutual funds but with a dash of life-insurance.

Over and above this, traditional life-insurance policies pay effective commissions of 29% to 60% of the first-year’s premium, exceeding 65% in some cases. 

4) What’s true for life insurance is also true for general insurance. In this case, premium sourced through brokers increased 37% from 2022-23 to 2024-25, while commissions went up 173%.

5) To cut a long story short, distributor remuneration is growing four to five times faster than the business it is paid on.

I dug up a little more looking at the annual commissions paid by life insurance companies.

Take a look at the following chart. It plots the new business commission and total commission paid by life insurance policies, along with new business commission as a proportion of the total commission (right-hand side).

New business commission includes commission paid to agents for the first-year premium of insurance policies, along with the premiums paid towards single-premium policies and any rewards on this new business (wherever reported). If we leave out the rewards, it does not make a material difference in the argument being made.

The total commission includes the commissions explained above, along with regular commissions paid to keep the life insurance policies going. 

Source: Author calculations on data sourced from annual reports of Insurance Regulatory and Development Authority of India.

In 2017-18, the new business commission of ₹140.4 billion formed around 55% of the total commission of ₹253.5 billion paid by life insurance companies. In 2024-25, new business commission of ₹408.2 billion amounted to 67% of the total commission of ₹608 billion. 

What does this tell us?

1) Life insurance companies are paying more of their total commission just in the first year.  

2) While life insurance policies are called life insurance policies, what is basically sold are investment plans. Unlike mutual funds which try to attract money from retail investors by highlighting their past performance, insurance companies offer high commissions. (Now, this isn’t to say that mutual funds don’t mis-sell.) 

3) This creates a problem. If a bulk of the first year’s premium disappears, only a proportion of the premium paid is being invested. And this shows up in the policyholder’s portfolio in the form of lower returns over a period of the first five years. This leads to many life insurance policyholders stopping their premium payments before completing five years. 

4) This explains why what insurance companies call the persistence ratio is on the very high side. As the consultation paper points out: “In life insurance, the 61st month persistency rate is only 48%, indicating that more than half of policyholders discontinue their policies before completing five years.” 

5) In simple English, this is wealth destruction. Also, with such high commissions being paid in the first year, it’s in the interest of agents to keep selling newer policies to even existing policyholders. 

So, in some cases, after being misled by their agents, it’s possible that policyholders may be stopping to pay premiums on old policies to start new ones. Come what may, the agent always wins. 

6) Take a look at the following chart. It plots the total commissions paid by life insurance companies as a percentage of the total premium collected.


Source: Handbook on Indian Insurance Statistics

 The total commissions paid by private life insurance companies has more than doubled from around 4% of total premium collected in 2015-16 to close to 9% in 2024-25. 

What does this mean? Many policyholders are stopping their premiums seeing disappointing returns. So agents have to be incentivised more to go out and find – for the lack of a better term – newer bakras. 

At the same time, the higher first-year commissions also encourage insurance agents to get existing policyholders to stop paying premiums on their current policies and start new ones. 

Of course, which kind of scam a policyholder falls for, depends on their level of understanding of things. 

So, what does this tell us? 

1) All these years, the insurance regulator, IRDAI, has been behaving like an industry lobby and not a regulator. Their data shows clearly. 

2) The top bosses at IRDAI tend to be retired executives from the Life Insurance Corporation of India. From their very limited perspectives, high commissions do not seem to be a problem. (Though to be honest here, LIC commissions have barely moved from 2015-16 to 2024-25.)

3) Over the years, a lot of premium collected by LIC ended up being invested in government securities to finance the government’s fiscal deficit – the difference between what it earns and what it spends. This possibly led to the government turning a blind eye to high commissions.

4) High insurance commissions are also an impact of the bancassurance model of distribution, where a financial group owns a bank as well as insurance companies, and uses the distribution network of banks to sell insurance as well.  

5) This is by far the most important point of this piece. Despite high competition in the insurance sector, the consumer has come out worse off, especially when it comes to investing through life insurance companies. 

What this means is that just high competition isn’t enough to ensure that the consumer gets a good deal. That needs to be backed with good regulation too, otherwise firms are happy to rip consumers. And from what we have seen, IRDAI all these decades hasn’t had the best interests of insurance consumers on its mind. 

So, is there hope?
1) The current IRDAI chairman is Ajay Seth. He is a retired IAS officer, having retired as the country’s finance secretary last year. Given this, hopefully, he is not coloured by the same biases that retired LIC executives are. (If he was, IRDAI wouldn’t have published the public consultation report to begin with.)

2) The paper proposes commission caps and wants to ensure that commissions are more evenly spread over the period of the policy and not front loaded like they currently are.  

3) The trouble is that there is a whole network which enjoys the benefits of these high commissions. These include banks, non-banking finance companies and other agents selling life insurance. These agents have a voice at the table. They are organised. It is in their interest to ensure that the current system or a slightly weaker form of the current system, continues.

So, the people selling insurance are organised, well-funded and sitting at the table. The people buying it are not. That is precisely why IRDAI needs to remember whom it is supposed to regulate. Otherwise, in a country of 1.5 billion people, there will always be another bakra waiting to be sold another insurance policy.