Insurance agents, brokers may get lower commission after GST cuts

From 22 September, GST on individual life and health insurance policies was reduced to zero from 18%, but the removal of input tax credits has increased insurers’ costs.

Insurance companies used to claim input tax credit on things like commissions, office rent and brokerage, among others.

This allowed them to reduce their overall GST liability on premiums by partly offsetting the GST paid to their suppliers against premiums received from customers.

According to industry experts, insurers are likely to trim payouts to agents and brokers to avoid raising premiums in a highly competitive market, even as they explore digital partnerships and cost-saving measures to maintain long-term growth.

Cost pressure

“Ceteris paribus, companies will have to bear the cost of 4-5%, which was availed as ITC (input tax credit) earlier,” Motilal Oswal Financial Services said in a 4 September note, adding that insurers either have the option of raising the base premiums or cutting commissions as “a large portion of ITC was arising from commissions”.

Mint had reported on 4 September that insurance companies expect a rise of 3-8% on expenses due to the loss of ITC benefit.

Under pressure to pass on the maximum benefit to customers, several insurers such as New India Assurance and SBI General have since then said that they plan to pass on the entire 18% benefit to policyholders.

Further, industry regulator Insurance Regulatory and Development Authority of India’s (Irdai’s) 30% cap on expenses of management (EoM) is likely to limit insurers’ ability to absorb all the additional costs.

“Some (insurers) like New India, have already said they will absorb it (the additional burden), so we will have to wait and watch,” said Tijo Joseph, chief financial officer and chief compliance officer of Anand Rathi Insurance Brokers.

“The industry is in dialogue with the regulator and government on possible relief measures, but some moderation in payouts cannot be ruled out.”

Insurers are hopeful that with increased demand for insurance products led by the GST removal and increased retention of the old book in terms of the number of policies, the hit from higher expenses should normalize in the medium to long term.

“Over the mid to long term, growth in volumes will help absorb most of the input tax credit impact,” said Asit Rath, chief executive officer of Aviva India Insurance.

“At the same time, the industry will need a multi-pronged approach to remodel expenses so that the maximum benefit can be passed on to customers.”

“This could include managing the cost of intermediation with calibrated adjustments in reward structures, encouraging staggered commissions over the policy term and expanding lower-cost retail distribution,” he said, adding that insurers are also looking at new digital partnerships, especially with innovative players in the health and wealth ecosystem, to bring down overall distribution costs.

As such, the need for rationalization of commission expenses comes at a time when Irdai has been asking insurance companies to re-look their benefit structures and reduce commission expenses.

A recent media report said that the regulator may have suggested a mutual fund-like total expense ratio (TER) structure for commission payouts by insurers.

“While higher sales volumes post-GST cut may partly offset this, the timing is challenging given Irdai’s parallel push for rationalized commission structures,” Anand Rathi Insurance Brokers’ Joseph said.