Non-life insurers may have to reduce payouts to adhere to EoM norms

Unlisted life players may rack up a commission war to gain market share

The new guidelines on expense of management (EoM) and commission payout may not necessarily reduce commissions, but payouts to distributors, which sometimes exceed the prescribed commission limits, could possibly come down so that insurance companies remain within the regulator’s EoM cap, say analysts.

Experts have suggested that general and health insurers may have to reduce their payouts to adhere to the EoM caps prescribed by the regulator, while listed life insurance companies may see themselves involved in a “commission war” with the unlisted mid-tier companies, which may be in a position to offer better payouts to distributors since they aren't under pressure to generate higher margins every quarter.

Last week, the central government notified the Insurance Regulatory and Development Authority of India (Payment of Commission) Regulations, 2023. It had notified the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers Transacting Life Insurance Business and General or Health Insurance Business) Regulations, 2023 last month. These regulations are broadly in line with what the insurance regulator had proposed in its revised draft.

With these norms, Irdai has now moved from product-led commissions to company-wide level expenses, providing more autonomy to insurers to decide on the amount of commissions they want to shell out, as long as they stay within the EoM limits prescribed.

According to N S Kannan, MD & CEO, ICICI Prudential Life Insurance, the increased flexibility in commission limits will allow insurers to react to market forces in a quicker manner, thereby supporting the Irdai’s vision of improving insurance penetration in the country. “The EoM has increased allowability in the later years of the policy while limiting expenses in the initial year. This will persuade insurers to work on improving long-term persistency, which in turn will improve the customer proposition as well as the company’s profitability,” he said.

Emkay Research said in its note on April 3, that under the new regulations, there will be pressure on general insurers and standalone health insurers to reduce various payouts to distributors to bring down EoM.

"With the majority of the insurers above the prescribed norms of expenses and with the industry reeling with a combined ratio of more than 118 per cent, these EoM limits will help bring cost discipline and take the industry in the right direction of prudency and profitability”, Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance had said last week.

Secondly, according to the research report, the removal of the commission would mean that public sector banks can now accept higher commissions transparently, which could perhaps increase the number of public sector banks’ tie ups with insurance companies.

“As the new commission rules remove any cap on commission payouts, hopes are running high that public sector banks will enter into tie-ups with multiple life/general insurers as they can now transparently receive higher commissions”, said analysts at Emkay Research. According to them, this could spell trouble for SBI Life because given SBI’s huge network, other private life insurers will be ready with lucrative offers to leverage the SBI network.

The report further states that these new regulations may lead to a commission war in the life insurance industry, wherein aggressive unlisted private life insurers currently under EoM limits, who do not have to report value of new business (VNB) and return on embedded value (RoEV), can create difficulties for listed life insurers by offering higher commissions in common channels. “Middle-tier unlisted life insurers, who are likely under EoM caps, can notch up their payout game and trouble listed life insurers in the near term”, the report said.

But industry insiders do not seem to agree with this hypothesis. “Unlisted players have boards who they are answerable to. So, an unlisted player cannot go out of its way and pay commissions which violates their board approved policy. Hence, I don’t think there will be an arbitrage between listed and unlisted players when it comes to commissions”, said the CEO of an unlisted private sector life insurer.