Commissions & Distribution Cost
What insurers pay agents, bancassurance partners and brokers to bring in premium — the largest single slice of the expense ratio.
Why you care
Almost nobody buys insurance without someone selling it — an agent, a bank at a loan desk, a broker, a web aggregator. Whoever it is gets paid, and that payment is the biggest controllable cost an insurer has. The channel mix quietly decides how expensive an insurer's whole book is.
Run the numbers
On ₹100 cr of premium, an insurer paying 18% commission spends ₹18 cr just to acquire business (illustrative). A rival selling direct online might pay a fraction of that — and can run a higher loss ratio yet still beat the first insurer on the combined ratio.
Where this goes
Commissions are the largest line in the expense ratio, so distribution strategy is expense-ratio strategy. And the whole thing sits under a cap: IRDAI's EoM limits restrict total commissions plus expenses, so an insurer can't simply buy unlimited growth through payouts.
Why you care
Commissions and distribution cost are what an insurer pays the people and channels that bring it business: individual agents, corporate agents, bancassurance partners (banks selling insurance at their branches), brokers, and web aggregators. It is the single largest slice of the expense ratio, and often the difference between one insurer and another.
Insurance is overwhelmingly a sold product, not a bought one. Very few people wake up and buy a health or motor policy unprompted, so the insurer has to pay for the act of distribution — and different channels cost very differently. A bank selling cover to its own account-holders, or a direct-to-consumer website, is cheap; a spread-out agency force or a broker-driven corporate book is expensive. Because this cost is both large and a matter of strategic choice, it is where an insurer's whole cost profile is really set. An insurer that owns a cheap channel has structural room either to price more keenly or to accept a slightly worse loss ratio and still win on the combined ratio. One that rents its distribution expensively has to underwrite that much better just to stand still.
Run the numbers
The insurer earns ₹100 crore of premium and pays ₹18 crore in commissions — an 18% acquisition cost that is the biggest chunk of its 35% expense ratio. Now compare two business models on the same ₹100 crore book:
| Agency-heavy insurer | Direct / digital insurer | |
|---|---|---|
| Commission cost | ₹18 cr (18%) | ₹5 cr (5%) |
| Room this buys | Must keep loss ratio tight | Can absorb a higher loss ratio |
| Combined ratio at 70% loss | 70 + 35 = 105% | 70 + 22 = 92% |
Same claims experience, same premium — but a 13-point gap in the combined ratio, driven almost entirely by what each insurer pays to acquire the business (illustrative). Distribution cost is not a back-office detail; it is one of the main things separating a profitable general insurer from a break-even one. It is also why every insurer is trying to shift its mix toward cheaper direct and digital channels.
Where this goes
Commissions are the largest and most strategic component of the expense ratio, so an insurer's channel mix is, in effect, its expense-ratio strategy. But the payouts are not unlimited: IRDAI's Expenses of Management (EoM) limits cap total commissions plus expenses as a share of premium, precisely so insurers can't buy runaway growth by overpaying distributors. That cap is the regulator's brake on the whole expense side of the combined ratio.