While reforms to distributor economics for savings-oriented life insurance products were clearly overdue, a few gaps on the protection side, including term insurance and non-life insurance, must be highlighted.
Earning demand and trust
Insurance is still a category with weak consumer pull. Customers rarely walk into a distributor’s office asking for a particular product. They are often being convinced that they need one. That distinction matters.
A trusted consumer product can sustain lower distribution margins because consumers understand it and actively seek it. A complex product with weak awareness and low trust requires more persuasion.
In fast-moving consumer goods (FMCG), a trusted protein brand can reduce trade margins as demand grows and trust is earned. Insurance today has neither to the same degree. The customer often relies more on the person selling the product than on the product itself. Reducing the economics of distribution before fixing the product could reduce the incentive to sell without creating the demand to buy.
There is, however, an important exception. Commission reform was clearly needed for life insurance investment products, where high upfront incentives have contributed to aggressive selling. The economics of these products are different from protection products, where distribution often requires genuine advice and effort.
Claims and grievance experience is one part of the problem. A difficult claim or unresolved grievance can create rapid negative word of mouth and discourage others from buying insurance. Beyond claims, post-sale product experience is another concern. People who have invested years in a product can face uncertainty when prices for old products are hiked, while the same insurer offers newer products at lower prices to new customers. Even renewal pricing grids are not trans parently available, leaving customers with little visibility into what they may pay in the future. Existing customers should have such a good experience that they become advocates for the product. In insurance, the experience is increasingly moving in the other direction.
Measure customer value
The consultation paper is right to recognise that selling different insurance products requires different levels of effort and should therefore be appropriately rewarded.
However, a granular framework is needed to measure whether distributor effort is aligned with advising the customer and creating value. Fixed assumptions about effort can create a lowest-common-denominator approach, where distributors optimise for the minimum activity required rather than the value they can create. Outcomes such as persistency and lower grievance rates should also be recognised.
The consultation paper gives a higher commission cap to a single-insurer agent than to an agent who sells multiple products. Today’s customer increasingly needs an expert who can evaluate choices, compare alternatives and guide them towards a suitable solution.
Giving a tied distributor a higher commission because they have fewer choices focuses on the distributor’s constraints, rather than the customer’s needs. It could encourage more distributors to become product sellers rather than solution providers.
Selling a product from a newer insurer can require more effort to build customer confidence than selling an established brand. If the economics do not recognise this, distributors may naturally prefer established players, making it harder for new insurers to build distribution for innovative products.
Finally, the framework should examine whether commission structures discourage distribution to customers who need it most. Because commission caps are maximum caps, insurers can choose to pay less, and products for senior citizens, persons with disabilities as well as customers seeking lower sums insured can end up with lower or even zero commissions. If effort is the criterion, serving these customers cannot simultaneously be treated as high effort and economically unattractive.
Fix the incentives, not just rules
The reversal of self-regulation on commissions may be necessary today. But after 25 years of private-sector participation, the need for increasingly prescriptive intervention tells us something important.
Irdai’s own analysis shows that current incentive structures have encouraged a focus on short-term outcomes that are not always aligned with the customer. Without reviewing these incentives, the industry may simply learn to navigate around the new rules rather than change the behaviour that created the problem.
Rules and caps can change behaviour. Incentives determine whether organisations merely comply with the rules or actually change the behaviour that created the prob lem. No regulator can adjudicate every commercial decision made by every insurer and distributor. Enforcement is necessary, but not infinitely scalable.
The sustainable objective should therefore be to tackle the root causes of short-term behaviour beyond distributor commissions. The industry needs incentive designs that make customer centricity economically rational for every player. The consultation paper has laid a strong foundation. The next step is to ensure industry economics reinforce the outcomes the regulator wants to see.
India does not need an insurance industry that is merely cheaper to distribute. It needs an insurance industry that customers actively want to buy from. The regulator’s first priority should be to get the product right and ensure a fair customer experience. Only then should it turn to fixing the economics of distribution.
The Author is Founder Beshak.Org