Distributors calling the shots in non-life pushes up costs for insurers and buyers: report

NEW DELHI: Non-life insurance has become a distribution game with intermediaries making most of the money even as insurers suffer underwriting losses and customers pay high premiums for non-life covers such as motor insurance and health, according to a report. The report sees commissions as one of the main drivers of higher costs in the non-life segment.

The report, The Big Profit Unlock in General Insurance by Praxis Global Alliance, notes that "Intense competition to secure intermediary mindshare and wallet share keeps commission payouts structurally high, resulting in persistently elevated expense ratios across the industry."

The report validates concerns raised by the chief of the Insurance Regulatory and Development Authority, Ajay Seth, who recently highlighted that persistently high commission payouts are squeezing margins and weakening underwriting profitability, particularly among public sector general insurers. He indicated that this warrants scrutiny of the expenses of management norms and commission structure to ensure better value for customers.

The study finds that rather than spend on expanding the industry by including more of the uninsured, the current intermediary model forces insurers to pay commissions continuously for what is essentially customer retention. While insurers do not earn much from underwriting margins, there is still a focus on the topline because the premium float enables them to earn investment income. As a result, investment income, rather than insurance operations, is sustaining profits, with investment income around 21% of net written premium.

"In an intermediary-led model, there is a ~15–20% differential between commissions for new and renewal business, but renewal economics continue to remain cost-heavy, with insurers incurring fresh commissions and acquisition-like expenses. As a result, each renewal behaves similar to a new acquisition, limiting the ability to benefit from prior customer acquisition," the report said.

In health insurance, the report notes that a large part of premium growth comes from medical inflation, which is around 10–12%. "Indian insurers experience high annual churn, with motor insurance seeing around 50–55% churn (35–45% in retail) and health insurance witnessing over 25% churn in the initial years," the report said.

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