LIC's commission outgo and operating expenses (as % of total premium) is much lower than that of private players. Data from the life insurer's draft IPO prospectus shows that LIC spends 14.2% of total premium income to pay commission to agents and manage operations. For private players, the figure stands at 16.9%.
Given that LIC collected total premium of Rs. 4.03 lakh crore in FY 2021, the expenses come in at Rs. 57,267 crore. In the case of private players, the expenses stand at Rs. 1.06 lakh crore.
The costs (commission and operating expenditure) are declining for life insurers with each passing year, especially for private players. In FY 2016, the expenses were as high as 20.7% for private players. It came down to 19.2% in FY 2017, 18.3% in FY 2018 and finally 16.9% in FY 2021. In the case of LIC, expenses have remained more or less the same in the last 6 years.
Total cost ratio (as % of total premium)
In the prospectus, LIC said that costs are coming down due to emergence of fintechs. "LIC’s expense ratio is considerably lower than that of private players on account of it being a mature business. For private players in the industry as well, the operating costs are coming down on account of higher dependence on technology and fintech tie-ups for multiple operations," the life insurer said.
Commission payments account for the major part of the expenditure incurred by life insurers as they have high dependence on agents to drive sales. In FY 2021, individual agents had 58% share in new business premium followed by corporate agents, brokers and direct channels.