Indemnity commission in protection, explained
Indemnity commission brings revenue forward. It also brings forward the risk that some of it will be paid back.
Two ways to be paid
Protection commission is usually paid in one of two ways. With non-indemnity commission, the distributor receives a share of each premium as the customer pays it, so revenue builds up over time and there is little or nothing to repay if the policy lapses. With indemnity commission, the insurer advances a lump sum, typically equivalent to a number of months or years of expected commission, when the policy starts.
Why indemnity is common
Indemnity commission helps distributors fund the cost of acquiring and advising customers, which is incurred upfront. It smooths cash flow for growing firms and allows them to invest in new business. Many protection distributors take most or all of their commission on an indemnity basis.
The earnings period
The advance is earned over an earnings period set out in the insurer's terms of business. Until the policy has been in force for that period, part of the commission is unearned. Earnings periods vary between insurers and arrangements, and are commonly measured in years. The terms also set out how unearned commission reduces over time, often on a straight-line basis month by month.
How clawback is calculated
If a policy is cancelled or lapses within the earnings period, the insurer reclaims the unearned portion. As a simple illustration, if commission is earned evenly over 48 months and a policy lapses after 12, around three quarters of the advance would be unearned and reclaimed. The exact calculation depends on the insurer's terms. The earlier the lapse, the larger the reclaim.
Managing the cash flow risk
Because clawback depends on future lapses, firms taking indemnity commission carry a liability that is not always visible. Sensible practice includes forecasting clawback from cohort persistency data, holding reserves against expected reclaims and monitoring early lapse rates closely. Some firms take part of their commission on a non-indemnity basis to reduce exposure.
Reducing the liability
The most effective way to reduce the clawback liability is to improve persistency, especially in the early months when reclaims are largest. That means suitable advice, a clean handover, post-sale checks, prompt failed-payment follow-up and continued engagement. Across anonymised Adviser.ai client data, customers who complete a post-sale check have been around 50% less likely to cancel.
Regulatory considerations
Commission arrangements fall within the Consumer Duty's price and value outcome. Firms need to consider whether their remuneration is consistent with the products providing fair value, and that commission structures do not create incentives that lead to poor outcomes, such as unnecessary replacements. Clear evidence of good advice and post-sale support helps demonstrate this.
Questions to ask
What share of our commission is indemnity, and with which insurers? What are the earnings periods and reduction methods in each set of terms? What is our expected clawback over the next twelve months, based on current cohorts? How much of that is influenceable? And what are we doing in the first 90 days after each sale to reduce it?
Accounting for clawback
Because indemnity commission may be partly repaid, firms need to consider how it is recognised in their accounts and whether provisions are needed for expected clawback. Accounting treatment depends on the firm's circumstances and the applicable standards, so finance teams should take appropriate professional advice. Reliable cohort persistency data makes any provision more accurate.
Comparing insurer terms
Commission terms differ between insurers in the amount advanced, the earnings period, how unearned commission reduces and what triggers a reclaim. Comparing them side by side, alongside the persistency the firm achieves with each insurer, shows where the clawback risk is concentrated.
Indemnity and the customer
Customers are unaffected by how a distributor chooses to take commission, but the incentives it creates matter. Indemnity commission rewards the sale upfront, so firms need strong controls to make sure advice is suitable and customers are supported after the sale. Monitoring early lapses, replacements and complaints by adviser helps show that the commission structure is not driving poor outcomes.
A worked illustration
Suppose a distributor receives £1,000 indemnity commission on a policy, earned evenly over 48 months. If the customer cancels after 6 months, about £875 is unearned and may be reclaimed. If they cancel after 36 months, about £250 may be reclaimed. The same lapse costs three and a half times more when it happens early, which is why the first months after the sale matter so much. Actual terms vary by insurer.
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FCA: FG22/5, final guidance on the Consumer Duty
FCA: PRIN 2A, the Consumer Duty
Adviser.ai figures are drawn from anonymised client data and are illustrative. Results vary by firm, product and implementation.
Last updated 27 October 2026