Despite backlash from insurance brokers, the Insurance Regulatory and Development Authority of India (IRDAI) is moving ahead with its plan to cap commissions paid by insurers to distributors. The regulator could implement its proposed distribution reforms as early as January 2027, IRDAI executive Girija Subramanian told Bloomberg in an interview.
Last month, IRDAI had proposed reintroducing product-wide commission caps for insurance distributors. The limits would apply to most insurance categories, including life, health, motor and property.
Additionally, the regulator has proposed tighter expense limits, capping the share of premiums that insurers can spend on commissions and other operating expenses. However, the regulator is allowing a transition period of five years for lowering expense limits.
IRDAI is taking a fast-track approach with commission caps as phasing them in could encourage distributors to rush sales ahead of each reduction, potentially increasing the risk of mis-selling, Subramanian said.
What’s potentially behind IRDAI’s proposal? Insurance premiums have not kept in pace with commissions since the rules were relaxed in 2023. And higher distribution spending has failed to produce a corresponding expansion in insurance coverage.
Expenses at private life insurers have climbed to about 22% of total premiums, from 16% in fiscal 2021. Those at private general insurers have risen to roughly 32% from 25% in fiscal 2019, according to IRDAI. Rewards paid to distributors have, in some cases, added 30% to 60% to base commissions.
Commission caps come under scrutiny from insurance brokers: The Insurance Brokers Association of India (IBAI) has expressed concerns over IRDAI’s proposed policy changes, arguing it could dent insurance broking sector’s revenue by 60-70%.
Further, the industry body argued that IRDAI data showing general insurance premiums sourced through brokers rose 37% between FY23 and FY27, while commission payouts jumped 173% does not portray the whole picture.
According to IBAI, the rise in commissions is largely due to re-classification of marketing and other expenses post-2023, which were actually disguised commissions in the earlier regime and were regularized.
“While optically the commission may seem to have increased, actually it was always there, but it was paid as marketing expenses. Nothing has changed,” the industry body said.
According to IBAI, general insurance industry’s operating expenses averaged around 26.5% of gross premiums, lower than the mandated limit of 30%. Policyholders received back Rs 84.4 in non-life insurance claim payouts for every Rs 100 of premium paid over five years, more than the global average of 72-75%.
“Customers are getting great value because this is a free and open market. A free and open market has competition. People compete for price, people compete for commission, they compete for value, they compete for coverage,” said IBAI.
Policybazaar mulls insurance manufacturing foray: The proposed commission caps by IRDAI could erase 30% of PB Fintech’s revenue, according to its co-founder and Group CEO Yashish Dahiya. PB Fintech, which runs the insurance marketplace Policybazaar, said its non-life insurance business is likely to take the biggest hit.
The management expects a 33-40% decline in revenue in this segment if general insurance commissions reduce by around 60% from current levels. During an analyst call on September 24, Dahiya said:
We think life insurance should not have a major impact. But in terms of general insurance, revenue could decline between one-third and 40% of what we have today. That’s a very serious impact on revenue.
See, if you look at our overall revenue, let us say we have Rs 100 crore of revenue. Of our core business, roughly half comes from general insurance, half comes from life insurance, let’s say broadly. And let us say our general insurance gets compressed by 60%. Let’s go with that. So, our total revenue will get compressed by 30%.
PB Fintech argues that it has spent years building a business around what it calls quality insurance customers and the value it has created through that quality should be recognised.
It becomes a little harder for me to justify not having a manufacturing entity of my own, because this somewhat takes away the trust in the fact that distributors would be rewarded for the quality of business they create. See, we have worked 18 years to create good quality business. Today, if we had created bad quality business or good quality business, if we’re going to get paid the same for both, to an extent, the joke is on us.
In the past, PB Fintech didn’t feel the need to become an insurance manufacturer because it could work with its partners on a combined operating ratio basis.
We are operating at a combined operating ratio of 93% in health. For Rs 30 of capital, with Rs 5 of interest income on that and Rs 7, that is Rs 12 on Rs 30; that’s a 40% return on equity. If you reinsure that, you can today reinsure commodity at 20%. And let’s say you reinsure 50% of that; then on your 50%, you can make a 60% return on equity.
So, I think we are giving a very profitable business. If somebody expects it to be more profitable than that, somebody expects it to be 100% return on equity, I think that’s an unfair expectation. And then that is where you get forced to become a manufacturer.
The management said it could consider obtaining an insurance manufacturing licence if changes to insurance commissions alter the economics of its business and the company or its customers are unable to profit from its distribution model.
Also read:
- Lowdown: Inside IRDAI’s consultation paper on the Public Insurance Registry
- Lowdown: IRDAI consultation paper on insurance distribution reforms
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