Insurance agents, brokers may get lower commission after GST cuts
Following the GST cut on insurance policies, insurers may reduce commissions for intermediaries to manage increased costs. With competitive pressures and regulatory caps, companies are seeking digital partnerships and expense rationalization to sustain growth while passing benefits to customers.
Insurance intermediaries such as agents and brokers may see a hit to their commissions, as insurers face pressure to pass on the full benefit of the recent GST (goods and services tax) cut to consumers.
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 categories such as 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.
“What is likely to happen in this case is that mostly the commissions paid to agents for retail health products, will now be inclusive of GST. And to that extent, commissions will go down," said Aniruddha Marathe, managing director and partner at Boston Consulting Group (BCG). In insurance, there is always a “tradeoff among the customer price point or affordability, distributor income, and insurer profitability," he added.
While he expects demand to go up as the nil GST makes significant reduction to the amount that the customers pay, Marathe believes the key here is potential increase in demand. “We need to see over the next few months how much is the demand increase because beyond the price point, other factors such as basic awareness, the felt need, and suitability of products also affect the demand," he said.
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."
Even if insurers start including GST as part of the commission, it will only partly set-off the hit on the insurance companies in life and retail health segments, as they will still have to pay GST on other cost elements such as rent, marketing, communication and travel, all of which will need to be absorbed by insurers.
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 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.
BCG’s Marathe believes it is not fair to compare the mutual fund industry with the insurance industry. The total expense ratio of mutual funds is the ratio of fee to assets under management, and not the cost of distribution to the revenue, which remains much higher.
“The most comparable segment in insurance is ULIP (unit-linked inurance plan), where commissions have already come down significantly. Currently, insurance products have relatively low awareness and they are more complex as compared to mutual funds," Marathe said, adding that while commissions should reduce to minimize intermediation costs, this reduction should go hand-in-hand with greater demand.
“Otherwise, agent incomes will come down, and they will not be as interested to continue as agents. This will lead to a negative spiral, and the insurance penetration will come down, instead of going up," he said.
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