India’s insurance industry relies significantly on various distribution channels beyond direct sales to drive new business. According to reports published by IRDAI, India’s agent-led distribution network has significantly risen in the last decade, with numbers reaching as many as 54 lakh distributors across life, health and general insurance.

An insurance policy is a long-term contract, but its distribution economics can be heavily front-loaded. In simpler words, the insurance agents may end up collecting a significant chunk of commission in the initial years of selling a policy. This results in a mismatch: While distributors may earn a significant portion of their remuneration in the initial years, the economic impact of the sale is reflected in the insurer’s and policyholder’s experience over the entire policy term.

We will explore these questions here. So, put on your thinking caps, and let’s dive in! 🎩

Understanding Commission Through An Actuarial Lens

The most direct way in which commission features in actuarial work is through its treatment as an expense assumption in product pricing. The key components typically considered in pricing include:

But Is It Really That Simple? Looking Beyond Lower Commissions and Premiums

At first glance, the equation above suggests a straightforward relationship: a reduction in commission lowers expenses, which, in turn, could translate into lower premiums. However, the impact is not quite that simple. From an actuarial perspective, there are three ways to look at this change.

1. Increased profitability for the insurer

This one is relatively straightforward.

For an Actuary, the above impacts are important to consider.

Will lower commission always result in lower premiums?

While it is easy to mathematically assume that a lower commission will always result in lower premiums, that is not always the case.

Say the insurer is saving ₹100 right now by reducing the commission paid to brokers. There are other ways it can put the ₹100 to use without lowering the insurance premium.

$\bullet \quad$They can retain this ₹100 as profit margin.

$\bullet \quad$They can invest in technology or improving after-sales services.

$\bullet \quad$They can potentially invest in a new distribution channel, like increasing their marketing budget.

What should you, as Actuaries, consider going forward?

We have already discussed the impact of this insurance overhaul from an Actuarial perspective. But for Actuaries, assumption setting is an important practice, and this move is expected to impact exactly that.

Every distribution channel produces a different customer profile. They may differ in:

$\bullet \quad$persistency;

$\bullet \quad$product mix;

$\bullet \quad$average policy size;

$\bullet \quad$acquisition cost;

$\bullet \quad$servicing requirements; and

$\bullet \quad$customer behaviour.

Therefore, a change in distribution strategy could ultimately change the underlying experience of the portfolio, which may, in turn, require assumptions used in pricing and future experience analysis to be revisited.

The Bigger Question

The debate around insurance distribution can easily become a debate about numbers.

But the actuarial perspective asks us to look beyond the percentage.

An insurance policy is a long-duration financial contract. The cost of acquiring that policy is only one part of its economics. The more important question is whether the distribution model produces sustainable business that creates value for the customer, distributor and insurer over the life of the contract.

So, the real test of the proposed changes may not simply be whether commission rates fall. It will be what happens to:

Persistency  •  Acquisition Efficiency  •  Product Pricing  •  Profitability  •  Customer Outcomes

once the insurance overhaul is implemented.

For Actuaries, this is an opportunity to look at commission rate capping through a slightly different lens. Not simply as an expense. And perhaps, that is the key question: