The economics of group health distribution

Summary

Irdai’s proposed distribution reforms need to account for the economics of group health insurance, where commissions are already low and intermediaries provide significant services to employers and employees.

Over the past few weeks, there has been considerable discussion around the Irdai consultation paper on distribution reforms. A central premise of the paper is that insurance commissions are too high and contribute to the difficulties policyholders face.

Insurance is a diverse industry, and the challenges vary across segments. Retail health, motor and credit life insurance each merit their own analysis. I write about group health insurance for company employees, a segment I know well. It is a large, growing market in which intermediaries play a significant role. But here, commission is not the central issue.

Before 2017, the commission allowed for brokers was 17.5% of premium. Subsequently, until 2023, the commission limit in employer-employee group health was reduced to 7.5%, with an additional reward on top. In 2023, specific product-level limits were done away with. Since then, commission for large and small companies has remained mostly unchanged, well under 7.5% for large companies and between 7.5% and 10% for smaller businesses. The only change was that commission and reward were merged.

Thin economics

Consider the economics of distributing group health insurance. For a company with 100 lives, the typical annual premium is about ₹6 lakh. Intermediaries will generally earn ₹45,000 as commission and incur costs of about ₹40,000, leaving a profit of ₹5,000, or about a 10% margin.