The Insurance Regulatory and Development Authority of India (IRDAI) has released its annual report for the financial year 2022-23. According to the report, life insurance companies paid a total commission of Rs 42,322 crore during the financial year 2022-23. Commission expense increased slightly from 5.18% in FY 2021-22 to 5.41% in FY 2022-23. The percentage is expressed as commission paid as a percentage of the premium received.
This is surprising because the increase in commission payments has far exceeded the increase in premiums. According to the annual report, the total commission expenditure during the financial year 2022-23 increased by 17.93% compared to the previous year. However, as per the report, total premiums increased by 12.98% during the year.
Private life insurers are matching LIC in higher commission payouts
Further analysis of commission data shows that there is a notable difference between public and private life insurers when it comes to increases in commission payments. Private sector life insurance companies paid more money as commission as compared to public sector life insurance companies. The ratio of first year commission to premium received in private sector companies increased from 10.94% in FY 2021-22 to 15.78% in FY 2022-23 – an increase of about 5%.
However, despite this increase in private sector commission payments it is still much lower than that paid by LIC of India. There was very little increase in the public sector company, with first year commission increasing from 26.55% to 27.61% – an increase of only 1%.
It is surprising that this increase in commission payments by life insurance companies has come despite a decline in first year premium collections. For private sector companies, first-year premium collections declined from Rs 73,943.39 crore in FY 2021-22 to Rs 70,834.75 crore in FY 2022-23. However, for public sector companies, first-year premium collections increased to Rs 39,089.94 crore in FY 2021-22 from Rs 36,649.35 crore.
Where is this High Commission going?
A life insurance company offers different types of policies such as unit-linked, term insurance and non-linked endowment policies. An assessment of IRDAI data shows that there has been a substantial increase in premiums collected from non-linked policies (like endowment plans, term plans, etc.) compared to unit-linked policies. The commission structure in ULIPs has reduced significantly after several reforms by IRDAI, although high commission structures on non-linked traditional plans continue.
Premiums collected from non-linked policies – offering life coverage – rose to Rs 5,05,741.57 crore from Rs 4,45,678.26 crore. On the other hand, linked policy insurance premium collected increased from Rs 88,625.45 crore to Rs 91,479.51 crore. The contribution of traditional products to the total premium collected was 86.59% and the share of ULIP was 13.41%. The turnover of traditional products grew by 14.40% and for ULIP it was 4.61%.
This means that private life insurance companies are focusing more on selling non-linked plans, including endowment plans, than UILIPs, resulting in higher commission payouts.
The profits of the life insurance industry have also increased significantly. Profit after tax of the life insurance industry increased by 452% to Rs 42,788 crore in FY 2022-23, compared to Rs 7,751 crore in FY 2021-22. This huge increase in profits is due to the increase in profits declared in the annual results of LIC.