LIC is contributing 27% of the first-year premium as a commission.

Screenshot 2024 01 22 143102 LIC

The recently released annual report by the Insurance Regulatory and Development Authority of India (IRDAI) has spotlighted a crucial aspect of the insurance industry – the commissions paid to agents and their impact on premium growth. Let’s delve into the key findings and understand the nuances shaping the insurance landscape.

Commission Breakdown: LIC Takes the Lead

According to the IRDAI report, public sector giant LIC is paying a substantial 27.61% commission to agents on the first year’s premium. To put it simply, if you pay Rs 100 as your initial premium, the agent receives Rs 27 as a commission from that first-year premium.

It’s vital to note that this figure represents the average commission, and variations exist among different policies. Generally, term insurance policies tend to have lower commissions, while unit-linked insurance plans (ULIPs) boast the lowest commission payouts compared to other life insurance categories.

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Commission Variations Across Policy Types

The IRDAI data highlights that commissions on non-linked endowment and term plans surpass the average rate of 27%, emphasizing the diversity in commission structures. Term policies typically have lower commission percentages, contributing to the overall commission average. This revelation underscores the strategic considerations that insurers take when designing commission structures for different policy categories.

Shift in Premium Collections: Non-Linked Policies Surging Ahead

A notable trend unveiled by the report is the substantial increase in premiums collected from non-linked policies, encompassing endowment plans and term policies, compared to unit-linked policies (ULIPs). Premiums from non-linked policies rose from Rs 4,45,678.26 crore to Rs 5,05,741.57 crore. In contrast, linked policy insurance premium collections experienced a more modest increase from Rs 88,625.45 crore to Rs 91,479.51 crore.

Traditional products, contributing 86.59% to total premium collections, witnessed a growth of 14.40%, while ULIPs grew by 4.61%, forming 13.41% of the total premium.

Private vs. Public Sector Dynamics: Commission Trends

While LIC pays a notable 27% in commissions, private sector life insurance companies have seen an increase in commission payments. The ratio of first-year commission to premium received in private sector companies rose from 10.94% in FY 2021-22 to 15.78% in FY 2022-23, marking a 5% increase. In contrast, public sector companies saw a marginal increase from 26.55% to 27.61%, a mere 1% rise.

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Implications and Speculations

The data prompts speculation that private insurers are placing more emphasis on selling non-linked plans, including endowment plans and term insurance, leading to higher commission payouts.

Despite the rise in commissions by private insurers, the first-year premium collections for private sector companies witnessed a decline from Rs 73,943.39 crore to Rs 70,834.75 crore in FY 2022-23. On the other hand, public sector companies experienced an increase from Rs 36,649.35 crore to Rs 39,089.94 crore in the same period.

Navigating the Complex Web of Commissions and Premiums

The IRDAI’s annual report unveils a complex interplay of commission structures and premium growth within the Indian insurance sector. As insurers grapple with varying dynamics, understanding the nuanced relationship between commissions, policy types, and premium collections becomes paramount for industry stakeholders.

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