Irdai's proposed distribution reforms may disrupt insurance growth

Proposed commission cuts could trigger broker consolidation and squeeze bancassurance, while tighter expense limits may put additional pressure on smaller insurers

The Insurance Regulatory and Development Authority of India’s (Irdai’s) proposed sharp cuts in insurance distributor commissions could trigger consolidation among brokers, squeeze bancassurance and corporate agency channels, and slow insurance growth in the near term, industry executives and analysts said.

 

The proposals could also put additional pressure on smaller insurers, which face higher operating costs as they scale up, after the regulator proposed tightening expense of management (EoM) limits.

 

Irdai on Wednesday released a consultation paper on distribution reforms, citing an almost four-fold increase in commissions paid to distributors between FY23 and FY25. It has proposed sharp reductions in commissions, with steeper cuts for insurance intermediaries than agents, from FY28.

 

“The industry is expected to see significant disruption and might end up with sharp correction in growth for a period of 2-3 years due to the proposed norms, as it will impact some of the major distribution models. This could also lead to exit of several brokers or consolidation in the segment as they find it unviable to do business in the existing format. The regulator could have suggested a glide path for commission cuts like in case of EoMs,” a senior general insurance executive said.

 

According to analysts, the proposals would result in a drastic cut of nearly one-third to half in commissions for new life, health and motor insurance, with lower commission caps proposed for banks and brokers than for agents.

 

Analysts at Emkay said the proposals seek to address the root causes of mis-selling and make insurance more affordable, but cautioned that the sharp reduction in distribution commissions could make insurance distribution unviable and less attractive as a business. This, they said, could hurt the regulator’s broader growth agenda and its “Insurance for All by 2047” vision.

 

Animesh Das, MD & CEO, ACKO General Insurance, said the reforms would force insurers and distributors to rethink their distribution models, particularly those dependent on captive channels such as original equipment manufacturers (OEMs) and banks.

 

“Lower commissions could lead to a 10–20 per cent correction in such business, while smaller players may face consolidation. Over time, companies have to focus on customer experience, brand building and an efficient distribution approach,” he said.

 

Krishnamoorthy Rao, MD & CEO, Generali Central Insurance, said rationalisation of commission structures could require intermediaries to reassess their cost models, particularly in channels with significant operating infrastructure.

 

“It will have to be seen how they change their cost structure after accounting for lower level of commission,” he said.

 

Lower commissions could also make low-ticket products such as personal accident and home insurance less attractive for traditional intermediaries and accelerate migration to digital platforms, Rao said.

 

The regulator has also proposed bringing down the EoM limit for general insurers to 20 per cent of gross direct premium income (GDPI) over the next five years, from the existing 30 per cent, while reducing the limit for life insurers to 10 per cent. Insurers said the tighter limits could put greater pressure on smaller players, which typically face higher operating costs.

 

Rao said the framework should recognise the structural cost differences faced by smaller insurers to ensure distribution remains competitive, sustainable and inclusive.

 

“The speed and extent of the proposed changes could be disruptive. The glide path for life insurers to move from 15 per cent to 12.5 per cent in two years and 10 per cent in five years will be difficult for smaller players. The proposed changes are welcome but there could be a measured transition so that insurers and distributors can adjust their cost structures, business models and sales volumes. We might request for glide path in expense of management, commission changes and for bringing the renewal commission at par both for agents and intermediaries,” a senior life insurer said.

 

Analysts said the changes are likely to affect the revenues of insurance brokers, banks and NBFCs more than individual agents, potentially impacting banca-heavy insurers and those relying on open-architecture distribution models. Insurers with a larger agency base may be relatively less affected, they said.

 

According to analysts at Motilal Oswal, the proposed changes would require significant adjustments in the way insurers conduct business across products and channels.

 

“We believe VNB margins and combined ratios for insurers will improve over the medium term; however, business growth in the shorter term could face challenges given disruption in many channels,” they said. 

Apprehensions 

• Industry execs warn proposed norms could trigger broker exits or consolidation
• Lower payouts could make insurance distribution less attractive — especially for low-ticket products
• Analysts expect near-term disruption, even as profitability metrics may improve over medium term
• Industry may seek phased transition to allow insurers and distributors to adjust cost structures and business models