What is the real cost of insurance rebates for policy buyers?

Insurance agents operate in a hyper-competitive environment, battling aggregators, digital insurers and shrinking margins. In this squeeze, commission pass-backs, also called rebating, these “discounts” distort the very principles of fair competition, transparency and trust that insurance depends on.

Nowadays, many consumers know it exists and openly negotiate for it because they have heard another agent is offering a better deal. That creates a race to match discounts to retain business, turning price-cutting into a norm rather than an exception. In a market already squeezed by aggregators, digital players and margin pressure, these pass-backs become a survival tool.

What exactly is a pass-back?

Pass-back or rebating refers to an arrangement where an insurance agent offers part of their earned commission or any equivalent benefit in cash or kind to the policyholder or a related party to induce a sale or renewal.

This could take many forms: refunding a portion of the premium in cash, offering an equivalent gift or even routing the benefit through a relative of the client.

On paper, it seems mutually beneficial, like clients feel rewarded and agents secure the deal. But legally, it is a clear violation. Section 41 of the Insurance Act, 1938 explicitly prohibits offering or accepting any rebate on premium or commission unless explicitly permitted by the insurer’s published terms. Both the giver and the receiver are liable. Violations can attract penalties up to ₹10 lakh and even lead to suspension or cancellation of the agent’s license.

A primary survey conducted by Fingrowth Media with Upstox covering 750 life insurance consumers and agents across 20+ cities in India found that 39% of agents admitted to passing back commissions to clients or relatives.

When discounts cost more than they save

For policyholders, a ₹2,000 rebate/discount on a ₹20,000 premium may appear attractive, but it comes with invisible costs.

Since the pass-back reduces the agent’s effective commission, it often discourages post-sale service like renewal reminders or claim assistance. What begins as a win-win ends as a lose-lose.

Broader market context: Not just an Indian problem

Rebating is not unique to India. In the US, similar bans exist under the National Association of Insurance Commissioners (NAIC) model laws.

The NAIC’s 2020 amendment allowed “value-added services”. For example, offering free risk-monitoring apps or wellness benefits, provided they are non-inducive and enhance policy value. India’s framework could eventually evolve similarly, but until then, Section 41 remains absolute.

Consequences: What agents stand to lose

Agents face both regulatory and financial risks. Under IRDAI (Licensing of Insurance Agents) Regulations, 2016, violations of Section 41 can trigger:

• Licence suspension or revocation

• Monetary penalties up to ₹10 lakh

• Blacklisting by insurers or removal from empanelment

• Reputational fallout that limits future employment

Additionally, most insurers impose clawbacks. if a policy is sold due to mis-selling, the agent must return the commission, doubling the loss.

In summary

Insurance at its heart is a promise. Every pass-back takes away that promise. When 39% of agents bend the rules, it not only questions compliance but also the ethical compass guiding an industry meant to safeguard families, not out-negotiate them. Insurance business built on protection, the strongest coverage is integrity itself.