IRDAI Distribution Reforms May Lead to Cheaper Insurance Products

Mumbai: The insurance regulator’s proposed distribution reforms could lead to lower premiums on health and motor policies, higher returns on life insurance savings products, improved services but hurt industry growth over the short term.

“The intention of the regulator is that these reforms should lead to favourable outcomes for the policyholder such as higher returns on life insurance savings products, lower premiums for motor and health customers, easier claim settlement and better service standards. These are not happening because high distribution expenses are reducing the premium in the risk pool,” said an insurance official familiar with the regulator’s thinking.

“Why should customers bear 30 per cent acquisition cost on mandatory motor third party insurance? These gaps are constraining higher insurance penetration and expansion of insurance to far flung areas” added the official.

Says Nisha Sanghavi, director at Promore Fintech, “Premiums could reduce by 15-20 per cent but we need to wait and watch as this is still a consultation paper. They are trying to emulate the mutual fund model to stop upfront commissions.”

Says Venky Iyer, managing director and chief executive officer at Tata AIA Life Insurance, “I support these reforms given that they propose to bring in greater transparency and cost efficiencies in distribution leading to better consumer outcomes.”

“The industry could take some time to realign and reset but over time I expect these measures to surely help increase industry growth and insurance penetration in the country,” added

The Insurance Regulatory and Development Authority of India (IRDAI) on late Wednesday in a two part consultation paper titled ‘Recaliberating economics of insurance distribution’ proposed an overhaul of the economics and structure of insurance distribution, including lower expense limits for insurers, product-linked commission caps, greater disclosure of distributor remuneration and a clawback mechanism in cases of mis-selling.

The draft norms have proposed to cap the first-year commission on individual health policies at 15 per cent for distribution entities,

20 per cent for agents and associates. Renewal commission will be capped at 5 per cent of the premium for distribution entities and 10

per cent for agents and associates.

On traditional life insurance (participating or non-participating) and unit-linked plans with a policy term of up to five years, the

first-year commission for agents will be capped at 6.25 per cent and 5 per cent for other distribution entities, including corporate agents, brokers, composite brokers among others.

For life insurance policies with a term of 10 years and above, the first-year commission for agents is proposed at 25 per cent, followed by 5 per cent in renewal commissions. Distribution entities will be allowed a commission of 20 per cent in the first year and 3 per cent on renewals.

To encourage insurance to expand beyond tier 1 cities, the IRDAI will permit higher commission limits for rural areas and towns and cities with a population below 10 lakh.

The regulator's analysis found commission levels reaching unusually high levels across products and distribution channels. In life insurance, average commissions on first-year premiums ranged from 14-51 per cent, while maximum commissions touched 81 per cent in some product categories. In general insurance, maximum commissions reached as high as 93 per cent in certain health insurance segments.

IRDAI said distributor remuneration has been growing much faster than underlying business volumes. Across a representative sample covering most life insurance corporate agency business, new business premium rose 28 per cent between FY23 and FY25, while total distributor remuneration jumped 125 per cent.

Another key proposal is a phased reduction in insurers' expense of management (EoM) limits, which cover expenses associated with running the insurance business, including distribution-related costs. These caps are proposed to be reduced over five years starting FY27-28, closing out at 12.5 per cent of premium income for life insurance companies and 20 per cent for general and health insurance companies.

Says MD and CEO of a life insurance company, “Premiums will fall and the insurance industry will also slow down. There will be no money and room left for trying new business models or innovating.”