IRDAI faces pushback over proposed caps on insurance distribution costs, impacting fintech and insurer stocks

The insurance regulator is likely to face industry pushback over proposals to lower insurance distribution costs by reintroducing caps removed in 2023. Its consultation paper has roiled stock prices of fintechs specialising in selling insurance and, to a lesser extent, those of listed insurers.

IRDAI's proposed caps on commissions are a fraction of those being paid out now and will disrupt distribution of insurance in the short term. Yet the pain is unavoidable for the industry to put more money into coverage instead of commissions on sales.

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Growth of insurance is in line with the economy, but industry needs to grow much faster to make up for low penetration. A critical metric is the ratio of costs that go into providing cover and distributing products. This must be set right for improved long-term prospects.

The issue of distribution pricing is linked to transparency, and IRDAI's proposals have dealt with it at length. Mis-selling of insurance is rampant because of opaque cost structures, and the regulator's effort to curb it is welcome. Many insurance products are cross-sold with other financial products.

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Disentangling the incentive structures into discrete components is a genuine requirement. Related-party transactions must be brought under scrutiny. This apart, business practices among insurance stakeholders must be brought into the open. Effects of IRDAI's proposals will not be uniform because insurance distribution models differ across products, but the idea is to bring egregious incentives to heel.

Once set in motion, the process is likely to change industry dynamics. Insurers with lower costs are expected to benefit. This will shape industry feedback to IRDAI's consultation paper. Expect a concerted move to dilute some of the proposals, and the regulator will have to balance immediate reactions against lingering consequences. A rethink 3 years after new rules were imposed is not the easiest of choices. The harder bit, though, is getting stakeholders on board.