Why Irdai's flexible rules are significant for insurance industry

By removing the limit for agents, the regulator has provided insurers greater scope to build their businesses

This week, when the insurance regulator, Insurance Regulatory and Development Authority of India (Irdai), offered freedom to companies to set the rules for the payment of commission to agents, the stocks of most listed insurance companies rose.

Irdai Chairman Debasish Panda has notified that all insurance companies can now decide the commission rates they will pay an agent, for securing any type of business. Earlier, the regulator had placed a limit on different commission payments within an overall board-approved cap on expenses.

The liberalised rules mean that insurers could get more flexibility to synchronise their business goals and expenses. This could mean that an agent that brings in small ticket-size but large volume business, such as third-party motor insurance, could now get the same commission rates as those bringing in, say, pricier mediclaim policies that are less frequent. These commissions will be decided by the company boards from now.

As Ankur Nijhawan, CEO, Axa France Vie India Reinsurance, notes, “By leaving competitive dynamics to market forces, private insurers can now offer higher commission to agents that could potentially lead to a shift in business from the state-owned insurers. Agile companies will be able to target the profitable business of rivals”.  

The changes are expected to impact the non-life insurance business more, since life policies are relatively straightforward and the agency commissions are relatively uniform. 

But the reason this rule change will impact newly-listed state-owned Life Insurance Corporation (LIC) most is that its agency force exceeds the total of all private life insurers by a long margin. LIC has 1.3 million, they have 1.1 million. LIC’s agency force accounts for over 96 per cent of the new business generated for the company. For the private life insurance companies, it is the banks that generate the most business at 54.79 per cent via the bancassurance channels.

Yet, as the Irdai annual report notes, “The individual agents continue to be the dominant distribution channel in procuring individual new business. The new business premium procured by them is 55.01 per cent for FY22”. 

What is the share of business procured by agents in the non-life business? Here, the data is more nuanced. Brokers -- who represent clients, unlike agents who represent the insurance company -- are the largest marketing channels for private insurers at 41.26 per cent of the new business. But for the public sector companies, more than a third (37 per cent) of their business comes from individual agents. For the private companies, individual agents account for less than 15 per cent. Here, too, this number will surely rise with the liberty offered by Irdai. 

Why? In the non-life business, except for New India Assurance, the other three government-run companies are in no financial condition to offer extra benefits to their agents to bring in more business. Yet, they, like LIC, have the largest share of agents in the industry. So the competition to poach their agency force will again be at their expense.

The poaching game will now be led by the richer insurance companies. One of the benefits these companies can offer the agents is the ability to sell both life and non-life policies from the same stable. In the league of insurance companies, the top spots are held by companies from financial groups—ICICI, HDFC and Bajaj, which write both types of business. 

The announcement has seemingly perked up the shares of the insurance companies, which had slumped big time after the Budget announcements by Finance Minister Nirmala Sitharaman. She decided to remove the tax benefits from insurance policies where the annual premium is Rs 5 lakh and above. Life insurance companies had so far offered such policies to their high net worth clients—a PolicyBazaar estimate said that every fourth group mediclaim policy was offered for a premium of Rs 5 lakh or more after the Covid pandemic. 

The minister had also decided not to increase the tax discounts for life policies from the current limit of Rs 1.5 lakh premium or that for health policies for above Rs 25,000. 

Overall, these measures had deflated the industry. The companies were looking for momentum to revive growth and while Irdai data up to the end of January 2023 projects an 18 per cent business growth rate for life and 17 per cent for non-life, these numbers are expected to come down once the year-end figures are reconciled. 

A week ago, BNP Paribas held a discussion with the leading insurance companies on these issues. A note issued by the bank after the discussion noted it was meant to “contextualize recent policy and regulatory developments that have created significant stock price erosion”. In the past three months, the stock price of HDFC Life has slipped by 19 per cent. Other listed ones have slipped by similar margins. 

The critical point made in the note was that the downward move was not like a spiral and could be arrested. “The shift in stance between the pre-Budget commentary and now appears minuscule in relation to stock price reactions”. 

In this context, the regulator’s announcement is most significant. There is a good reason why an army of agents is needed by insurance companies. At the recently concluded Bima Manthan (March 1&2) organised by the regulator, the key push on the companies was to expand their reach. “Furthering the mission of maximum insurance inclusion, the progress of industry under the State Insurance Plan was deliberated. The insurance industry displayed enthusiasm for the flagship programme and committed to actively engage in taking insurance to every nook and corner of the country”, a release issued after the meeting noted. Reaching every nook and corner of the country as the government and the regulator demands, needs a sales force on the ground. They were told to “formulate a five-year plan to increase footprints of lead insurers in their respective states”. 

In the Indian insurance sweepstakes, grabbing the high performing segments of LIC’s agency force has always been the big prize. The scope for grabbing those men and women has now increased. At the BNP Paribas event, the five participating companies, HDFC Life, ICICI Pru Life, Max life, ICICI Lombard and Star Health all agreed that agency forces were critical to expand their business. The regulator has just shown how.