IRDAI proposals on insurance’s money machine leads to bloodbath for stocks: What happens to your money
Insurance premiums may decrease if the Insurance Regulatory and Development Authority of India implements proposed commission changes. Proposed limits on commissions aim to reduce mis-selling and distribution costs in the insurance market. The cha...
By ET Online | Updated:
Buying insurance could become cheaper over time, but the people selling those policies may have to earn less. However, that is if the insurance regulator’s latest suggestions go through. The Insurance Regulatory and Development Authority of India (IRDAI) has proposed tighter limits on commissions paid to banks, brokers and agents, along with curbs on digital practices that can push customers towards buying a policy.
The proposals are aimed at reducing the cost of distributing insurance and curbing mis-selling, but whether customers actually see lower premiums will depend on how insurers respond.
The proposals have already unsettled the market. Shares of insurance distributors and companies with significant insurance income fell on Thursday as investors assessed the possible impact on distribution earnings. PB Fintech, the parent of Policybazaar, fell 33.27% to close at Rs 1,258.80, while Turtlemint dropped 19.99% to Rs 109.10. Max Financial Services declined 9.71% to Rs 1,411.20, HDFC Life fell 4.96% to Rs 533.65 and ICICI Prudential Life ended 3.44% lower at Rs 467.85. SBI Life was down 0.09% at Rs 1,758.50.
But the proposals are not final rules. The IRDAI has issued them as a consultation paper and is seeking comments until October 25. There are chances that the framework could change after feedback from insurers, distributors and other stakeholders.
Why is IRDAI looking at commissions?
The regulator's concern is that the cost of distributing insurance has risen faster than the underlying business.
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Life insurers paid Rs 60,800 crore in commissions in FY25, an 18% increase, while premium growth was 6.73%, according to IRDAI data.
India is among the world's 10 largest insurance markets, as per a PIB backgrounder, but insurance penetration remains below the global average. IRDAI is therefore looking at whether insurance can be distributed at a lower cost while expanding coverage.
What is IRDAI proposing?
The biggest change is a return to product-level commission caps.
IRDAI had removed commission caps in 2023. Its latest proposal seeks to bring them back, with limits linked to the insurance segment, product, distribution channel, complexity and effort involved in selling and servicing the policy.
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Simply put, distributors would earn less for selling some simpler products, while products requiring greater effort could attract higher compensation.
Banks and brokers that can sell policies from multiple insurers would face lower commission limits than agents tied to a single insurer.
For life insurance, IRDAI has also proposed moving away from large upfront payouts and spreading compensation over the life of a policy.
How much could commissions change?
The proposed limits could significantly alter payouts in some segments.
For life policies with premium-payment terms of 10 years or more, first-year commissions for distribution entities are proposed to be capped at 20%, while individual agents would have a 25% limit. Renewals would attract lower payouts.
For shorter-duration products, the proposed caps would be lower.
In individual health insurance, first-year commissions for distribution entities are proposed at 15%, with 5% on renewals. For agents and associates, the corresponding caps are 20% and 10%.
Motor insurance could see an even bigger change. For compulsory third-party motor insurance on new vehicles, IRDAI has proposed zero commission for distribution entities, while agents and associates would be allowed 2.5%. Renewals of older vehicles would have limited payouts.
The regulator has also proposed additional incentives for insurance sold in small towns and rural areas.
The case of dark patterns & why IRDAI is targeting them
The latest set of proposals goes beyond commissions.
IRDAI has also proposed restrictions on dark patterns on insurance websites and digital platforms.
These are website or app designs that can steer customers towards an action they may not otherwise have chosen.
One practice flagged by the regulator is asking customers to provide personal information before allowing them to see basic information about a policy, including its features, price or quality.
IRDAI has proposed that insurers make product, pricing and quality information available in a standard and easy-to-understand format without first asking customers for their personal details.
The regulator has also proposed stronger safeguards against mis-selling. Suitability could become an enforceable obligation, with insurers required to document customer needs and suitability for specified life insurance sales and maintain an audit trail.
Will customers actually pay less?
IRDAI's argument is that distribution commissions form part of the cost of insurance. If insurers spend less on commissions, there could be room for those savings to reach customers.
But lower commissions do not automatically mean lower premiums.
Insurers could use the savings elsewhere, including technology, operations or customer acquisition. Whether policyholders see lower prices will depend on how insurers respond and what the final regulations require.
The changes could, however, reduce the incentive to push policies simply because they offer higher commissions.
What happens when insurance is sold with a loan?
IRDAI has also proposed tighter rules for insurance sold alongside bank loans.
Banks would not be allowed to make buying insurance a condition for getting a loan.
If a bank offers a lower interest rate to customers who buy insurance, it would have to disclose both rates. Customers would also have to be allowed to buy the insurance from any insurer.
The proposal is aimed at giving borrowers more choice and making the cost of an insurance-linked loan offer clearer.
Why change the way life insurance is paid for?
Large upfront commissions make the point of sale particularly important for distributors.
IRDAI's proposal to spread compensation over the policy period would change that structure.
It could also affect policies that customers buy but later stop paying for or surrender. If distributor compensation is linked more closely to the life of a policy, the incentive to sell a policy that does not remain active could reduce.
The regulator has also proposed clawbacks of commissions in cases of mis-selling, along with greater accountability for distributors.
Who could feel the impact?
Banks, brokers and digital insurance distributors could face pressure because their income is directly linked to commissions.
The impact could be particularly significant for businesses that rely on health, motor and life insurance distribution.
Insurers that depend heavily on bancassurance, which means the sale of insurance through banks, could also have to rethink their distribution models.
Dealer-linked motor insurance businesses could be affected if commissions on new-vehicle third-party insurance are brought down to zero.
The impact will vary across companies depending on their product mix, distribution channels and current cost structures.
What about insurers' own expenses?
IRDAI has proposed changes to insurers' Expense of Management, or EoM, limits as well.
For life insurers, the company-level EoM limit is proposed to fall to 15% of gross direct premium income within two years and 12.5% within five years.
For general insurers, the proposed limit would move from 30% of gross written premium to 20% of domestic gross direct premium income over five years.
The regulator has also proposed greater disclosure around commissions and stronger controls on incentives paid to bank and NBFC employees who sell insurance.
