The proposed changes to insurance distribution commissions have triggered a wider question beyond the impact on insurers and distributors: who ultimately benefits if commissions come down - customers, insurance companies or the wider distribution ecosystem?
The issue is still at the consultation stage, but experts discussing the proposals highlighted a mismatch between what is currently paid out through distribution and what policyholders receive in terms of suitability, service and claims support.
Monika Halan, author and financial educator, argued that the focus should be on whether distributors take greater responsibility for the products they sell. "When the distributor is the most important part of the chain, when the distributor, the agent, the bank takes responsibility for the product that it is selling, ensures suitability, ensures service and helps in the claim," Halan said.
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She argued that this could shift insurance from a "push product" to a "pull product", where consumers actively choose policies based on their needs. "So I think right now there's a huge mismatch between what is paid out as commission and what the consumer gets," Halan said.
According to Halan, the experience of the mutual fund industry shows that lower commissions do not necessarily have to mean weaker industry growth. She pointed to the removal of front commissions and the shift towards trail-based compensation, arguing that the mutual fund industry subsequently continued to expand. "The industry has thrived," she said, adding that insurance should similarly focus on improving the consumer experience.
CA Kanan Bahl, founder of Fingrowth Media and director of Mis-sold, also linked the commission structure to the incentives faced by distributors. Referring to insurance persistency, Bahl said the average 61-month persistency ratio for the top 10 life insurers is around 50%. He argued that customers who exit policies early can lose money, particularly when surrender values are substantially lower in the initial years. "And the commissions were so high that the incentive was aligned to sell more than to look at the interest of the customer," Bahl said.
At the same time, the debate raises a separate question over the impact on insurance agents and businesses that have been built around the existing commission structure. The key issue, therefore, is not merely whether commissions fall, but where the resulting efficiencies ultimately go. Halan argued that if distributors become more accountable and the savings improve the consumer proposition, the broader insurance market could benefit.
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