Social security schemes and direct sales reduce commission expenses of non-life companies

Social security schemes like crop insurance schemes that do not pay commission to agents and push to direct sales have helped non-life insurance companies reduce their commission expenses last fiscal, shows the latest General Insurance Council (GIC) data.

The data shows that 22 general insurers paid net commission of Rs.1,813 crore in FY 2016-17 as against Rs.3,000 crore in FY 2015-16, a decline of 61%. We have excluded standalone health insurers from the calculation.

At the same time, the industry has witnessed 32% growth in its new business premium to Rs.1.27 lakh crore in FY 2016-17.

Krishnamoorthy Rao, CEO, Future Generali India General Insurance said that the growth in premium of non-life business is due to increased sales of Pradhan Mantri Fasal Bima Yojana (PMFBY). “The government does not pay commission on crop insurance policy to agents and brokers which has led to a major reduction in commission expenses for insurers.”

The crop insurance segment emerged as the third largest segments for the non-life industry after motor insurance and health insurance. It has collected new business premium of Rs.20,000 crore last fiscal.

Push to direct sales has also contributed to the decreasing commission expenses. “A lot of general insurance companies are directly reaching out to large corporates with their policies. This has helped them reduce the commission expenses to a large extent,” said a senior official of a large non-life insurance company requesting anonymity.

Another key reason is net effect on balance sheet due to commission received from reinsurance companies. “Most of the private non-life companies cover their risk by paying a premium to re-insurance companies. In return, the re-insurer pays out commission to non-life companies. If commission received from re-insurance companies is more than commission given to agents and brokers, the balance sheet will reflect negative commission expenses,” says Sanjay Datta, Chief - Underwriting and Claims, ICICI Lombard General Insurance.

This is reflected in the overall commission expenses of private non-life companies. GIC data shows that 18 private non-life companies posted negative commission expenses of Rs.925 crore last fiscal.

Low commission expenses translate to low policy premium. If the insurer has a high commission expense, it charges higher premium for its policies to compensate for the higer cost, adds Datta.

On the other hand, the commission expenses of PSU insurers increased to Rs.2,738 crore in FY 2016-17 which is more than the total commission expenses of the industry. 

New India has paid highest commission of over Rs.1,300 crore to their agents.

Commission expenses of non-life insurers for FY 2016-17

Source: GIC