Pvt life insurers mull new model for commission for distributor channels

Clawback, deferral, or reduction in payouts on the cards for distributors

Following recent revisions to surrender value norms, private sector life insurers are preparing to adjust commission structures for distributor channels, based on persistency metrics.

Top executives from leading life insurance firms are set to meet next week with the Life Insurance Council, an industry association, to establish a uniform commission framework, according to people familiar with the matter. Their objective is to maintain consistency in commission payments across the industry and mitigate disruption for distributors.

Options under consideration include clawbacks, commission deferrals, and outright reductions. For large corporate agents — such as banks and non-banking financial companies — insurers are leaning toward clawbacks, while for individual agents, a mix of commission deferral and reductions based on persistency is likely, according to industry insiders. This overhaul, expected to unfold over the next two to three months, is being negotiated between private insurers and distributors.

“We are in various stages of operationalising the commercial changes with our partners. We have adopted tailored solutions, including commission deferrals, reduction of clawback depending on persistency track record, and partner preferences,” said Vibha Padalkar, MD & CEO, HDFC Life Insurance, in an analyst call on Tuesday, following the company’s Q2 result announcement.

Despite efforts to minimise disruption, insurers anticipate a reshuffling of individual agents as they gravitate towards insurers offering the most favourable terms, the sources said. According to Life Insurance Council data, as of September, over 3 million individual agents operate in the life insurance sector, with LIC representing 1.44 million and private insurers accounting for 1.59 million.  

A senior executive from a private sector insurer noted that clawbacks will primarily affect distributors with whom counterparty risks can be managed, while others will see a mix of deferral and reduction in commission payments.

Further complicating the landscape, recent cuts in the internal rate of return (IRR) for customers — initially driven by interest rate fluctuations — may happen again due to the new surrender norms. “The insurance industry is reviewing commission structures for sustainability, exploring deferrals, clawbacks, and reductions or a combination of these based on stakeholder preference,” said Rushabh Gandhi, MD & CEO of IndiaFirst Life Insurance.

Gandhi further said that, from a customer outcome perspective, recent yield curve declines have prompted insurers to adjust product guarantees. “The revised product constructs are still stabilizing and may evolve over the coming months. IndiaFirst Life will continue to monitor and adapt,” he noted.

It has been previously reported that the state-owned Life Insurance Corporation of India (LIC) reduced the first-year agent commission from 35 per cent to 28 per cent following surrender norm revisions, while increasing commission on renewal premiums to 7.5 per cent.

In June, the Insurance Regulatory and Development Authority of India (Irdai) issued a master circular on life insurance products, introducing norms for better payouts for customers exiting policies early. Effective October 1, these rules require insurers to pay an enhanced special surrender value (SSV) after the first policy year, provided one full-year premium is paid. Previously, such payouts were generally unavailable within the first year. Additionally, the new norms state that the discount rate for calculating paid-up value to determine the SSV will be allowed to be up to 50 basis points higher than the 10-year government security yield.

While the current IRR revision is due to changes in interest rates, further changes may depend on insurers ability to strike a balance between company margins, distributor commissions and customer proposition, said Mahesh Balasubramanian, MD, Kotak Life Insurance. “Discussions with distributors are ongoing, and it may take another couple of months to settle down with the commissions.”

Future Generali India Life Insurance MD & CEO Alok Rungta outlined additional strategies the industry is weighing: “They (companies) can either reduce commission, defer incentive bonus, offer higher persistency bonus (above 80-85 per cent), and clawback in case of lower persistency. These are multiple avenues being tracked across distribution channels including agents.”

The Fallout...

... of  revisions in surrender value norms

> Private life insurers to tweak distributor commission structure in 2-3 months

> Large corporate agents may face commission clawback; individual agents could see a mix of deferment and reduction

> Negotiations between companies and distributors are ongoing

> Consumer IRR, recently revised, may decrease further