The commission expense ratio i.e. commission paid with respect to the premium received of the life insurance industry has increased last fiscal.
IRDAI’s latest data shows that the first year commission expense ratio of the life insurance industry has increased from 18% in FY 2016-17 to 20% in FY 2017-18. This indicates agents have received 20% of the total premium they have collected as first year commission.
While the first year commission expense ratio of LIC India was close to 30%, it was 14% for private life insurers. Experts attributed this to the focus of LIC in selling traditional policies like money back, whole life and endowment. However, private life insurers focus more on linked policies such as ULIPs, which pay comparatively less commission than traditional policies.
The first year commission of traditional policies like whole life, endowment and money back having over 12 years of premium payment term is 35% of annual premium, insurers can pay up to 15-33% of annual premium on policies having premium paying term of less than 12 years depending on the tenure. Higher the tenure, more would be the upfront commission.
However, the commission expense ratio of the life insurance industry has reduced marginally in renewal business. The life insurer have seen their commission expense ratio decline marginally from 4.41% in FY 2016-17 to 4.27% in FY 2017-18. This is largely due to low persistency ratio of the life insurance industry. Persistency refers to the ability to keep renewing a customer’s policy till it reaches maturity. The higher the persistency rate, the higher the renewal premiums. Currently, the insurance regulator has fixed the trail commission (renewal commission) at 7.5% throughout the premium paying term.
In single premium policy where insurance agents receive 2% of the total premium as commission, the commission expense ratio of the life insurance industry was 0.55% in FY 2017-18 compared to 0.38% in FY2016-17.
Overall, the life insurance industry has commission expense ratio of 5.53% last fiscal. In its annual report, IRDAI said, “The overall commission expenses ratio (commission expenses as a percentage of premiums) increased marginally to 5.53 percent in 2017-18 from 5.29 percent in 2016-17. However, total commission increased by 14.63 percent (total premium growth 9.64 percent), first year commission increased by 21.93 percent (first year premium growth 10.75 percent), new business commission increased by 23.37 percent (new business premium growth 10.82 percent) and renewal commission increased by 5.36 percent (renewal premium growth 8.79 percent). The single premium has increased by 10.85 percent while single commission increased by 58.67 percent. However, there is some variation in the position when compared between the private insurers and LIC.”
In absolute terms, the life insurance industry has disbursed gross commission of Rs.25,353 crore in FY 2017-18 as against Rs.22,117 crore in the corresponding period preceding fiscal, an increase of 15% in a year.