Irdai's draft distribution norms could put insurance volumes at risk

Proposed commission caps, tighter expense limits and restrictions on loan bundling could disrupt distribution channels and lead to volume declines in the short term

 

The Insurance Regulatory and Development Authority of India’s (Irdai’s) consultation paper “Recalibrating Economics of Insurance Distribution”, released this month, marks the most significant proposed overhaul of distribution regulation since the 2023 Expenses of Management (EoM) reforms. The draft has sent shockwaves through stakeholders. 

Irdai proposes a redesign of insurance distribution and cost structures. The draft proposes all-inclusive caps on commission at a fraction of current payout, such as 2 per cent on credit life versus 28 per cent currently, nil on loan-packaged motor third party, 5 per cent on OD (own damage) versus 16 per cent currently, and 5 per cent on health versus 40 per cent at present. 

The proposed EoM limits are also stiff. The paper also proposes to prohibit compulsory bundling of insurance with loans and volume-linked incentives for staff selling insurance. If implemented without change, this would cut profit before tax by 1-12 per cent for non-banking financial companies (NBFCs) and fintechs distributing insurance. 

The release of the draft led to fintechs such as PB Fintech and all listed insurance companies witnessing sharp selloffs. The insurance arms of Axis and HDFC Bank may be affected more than those of SBI, ICICI, and Kotak Mahindra Bank. The current commissions on credit-linked products are at several multiples of the proposed caps. Group credit life payouts have risen towards 45 per cent, while NBFC channels are at 42 per cent. High-margin segments could, therefore, see severe compression. 

 

Some analysts estimate that commissions could compress 70-90 per cent in several high-margin categories if implemented as proposed. They think PB Fintech’s unit-economics cannot survive the proposed caps. Insurers may also see volume drops from proposed caps. 

Insurers with lower costs, and higher agency and ULIP mix — such as LIC and SBI Life — will be relatively less impacted. They may pass savings on lower commissions to customers to drive volumes. The industry is likely to give severely negative feedback to the draft and try to persuade the regulator to alter proposals. But there will be share price volatility until a final decision on the draft is taken. 

This is a big risk for PB Fintech and Turtlemint, which may see earnings drop by 10-12 per cent on new commission rates. Investors may, however, find buying opportunities if share prices drop further for insurers like SBI Life, Star, and ICICI General.

Compulsory bundling of insurance with loans and credit could be banned outright, and the proposed rules cover commissions, incentives, rewards, gifts, trips, and related-party payments. This will also be negative for bancassurance fees, such as credit-protect premiums, as these are mostly single premiums with high commissions. 

In 2023, policy changes removed hard commission caps and moved to an entity-level EoM ceiling computed on gross written premium (GWP). This paper proposes to reintroduce hard commission caps, tighten EoM, and restructure an eight-category distributor architecture into three types — insurance distribution entities (IDEs), insurance distribution person (IDP), and market infrastructure institution for insurance (MII). 

The architecture of consolidation comes with a reduced entry capital fee of only ₹10 lakh, and entity registration is permanent. This should mean more competition. The motor third-party cap is at near-nil for IDEs. The health first-year is capped at 15-20 per cent for IDEs or agents. For life insurance, the cap is at 20-25 per cent for the first year, and 3-5 per cent on renewal. 

The EoM cap is significantly tighter. For life insurance, the payout is 15 per cent of the premium in two years, and 12.5 per cent in five years. For general insurance, it is 25 per cent in two years, or 20 per cent of GDPI (gross direct premium income) in five years. The earlier limits for general insurance (30 per cent) and health insurance (35 per cent) will both be reduced to 25 per cent in two years. Bancassurance pays 33 per cent commission on average and compression will now result, along with mandatory bank-commission disclosure. Broker commissions rose from 8.5 per cent in financial year 2022-23 (FY23) to 17 per cent in FY25. This is a disincentive for broking. Cross-sellers may gain since IDEs and IDPs can now sell non-insurance financial and non-financial products even though insurance revenues are capped. 

In motor insurance, cashless repair-denial is banned, and OEM (original equipment manufacturer) incentive-linked agreements are also banned. Commissions grew 259 per cent versus 34 per cent premium growth over FY23-FY25 in the segment. In loan-bundling, only defined “acceptable packages” will be allowed with disclosed commission, separate payment, and no forced insurer choice. All insurers with over ₹100 crore in commission income, as well as IDEs with over ₹50 crore in revenues, must 

publicly disclose revenues, expenses, and related-party payments.

 If implemented, the proposed changes will drive substantial transformation across all products and channels. In the short term, there will be serious disruptions leading to volume drops. In the long term, value of new business margins may improve.

 

The writer is a New Delhi-based independent journalist.