Coverfox MD Sanjib Jha Questions IRDAI’s Insurance Reset, Flags Risk To Rural Penetration

In a pushback to the IRDAI’s proposed overhaul of the insurance distribution industry, Accel-backed insurtech startup Coverfox’s founder Sanjib Jha has written to the agency questioning whether sharply lower commissions could undermine insurance penetration. 

In a letter to the IRDAI, Jha argued that the proposed 2% remuneration cap for loan-linked protection products could make it difficult for lenders to continue distributing insurance to rural and low-income borrowers. 

He said that lenders have spent decades building the infrastructure needed to reach underserved borrowers and that the proposed payout may not be enough to sustain that distribution model. 

As per him, group credit-life commissions have historically averaged around 30%, although some payments were previously classified as marketing and advertising expenses rather than commissions, making a 2% cap undesirable enough for the ecosystem to stop chasing the rural consumer segment. 

Moreover, single-income households would suffer if the borrower dies without insurance cover, making loan-linked protection products critical. Citing NABARD’s NAFIS 2021-22 survey, he said that 52% of rural households carry debt, while only 24% hold life insurance. 

Jha has proposed a “Priority Sector Insurance” framework, modelled on RBI’s priority-sector lending, to expand coverage among underserved customers based on geography, income and product. 

He also suggested enabling established distributors to become insurers, subject to capital and conduct requirements, and using digital infrastructure, including corporate POSPs, to improve last-mile distribution. 

On costs, he favours regulating total expenses rather than individual commissions, with greater disclosure and audits. He also called for impact assessments, stakeholder consultations and a standing industry-consumer-academic advisory group.

Wider Industry Pushback 

Jha’s criticism comes a week after IRDAI released its consultation paper, Recalibrating Economics Of Insurance Distribution, proposing product- and channel-specific commission ceilings and tighter expenses-of-management (EoM) limits for insurers. 

The objective of the overhaul is to make insurance distribution more transparent and sustainable, protect policyholders from mis-selling and excessive costs, and ensure that the economics of distribution support wider insurance coverage.

The proposals have seen a broader industry pushback.

The Insurance Brokers Association of India (IBAI), which represents 798 licensed brokers, has warned that the proposed commission caps and tighter EoM limits could lead to job losses, weaken independent brokers and affect insurance distribution in Tier II and III markets. 

In fact, Pune-based insurance broker Quickinsure has announced more than 100 job cuts after deciding to discontinue its field relationship-management model. Its founder Anand Shrikhande said field-based models could become difficult to sustain under the proposed commission structure, while other brokers are considering shifting towards variable-cost models. 

Shrikhande also estimated that the wider industry could eventually see more than 1 lakh jobs affected if brokers reduce their reliance on salaried sales teams. 

Jha also warned of a similar effect on insurance agents and POSPs, particularly those operating outside India’s largest cities, as sharply lower payouts could make insurance selling financially unviable for POSPs, forcing some to exit the business and potentially reducing the reach of insurance in smaller towns and rural areas.

As per him, India has around 31 Lakh individual agents and 27 Lakh registered POSPs, while the industry has previously indicated that nearly 1 Cr agents could be needed to achieve the “Insurance for All by 2047” goal.

He has specifically asked IRDAI how it plans to address the potential job losses while simultaneously seeking to expand the country’s insurance distribution network.

Insurers have separately sought a more gradual transition to the new framework. At a recent meeting with IRDAI chairman Ajay Seth, senior executives from life, general and health insurers sought a glide path for commission reductions, differentiated EoM limits and greater flexibility for group credit-life products. 

Seth has defended the proposed reset, saying high upfront commissions are contributing to mis-selling and that savings from lower distribution costs should ultimately reach policyholders through lower premiums, better returns or improved claims outcomes.

The proposed framework is open for public comment until October 25. 

Bloodbath For Insurtech Stocks

The proposals have already triggered a sharp market reaction with companies working in the insurance industry seeing significant erosion in their stocks in a few trading sessions. For instance, Policybazaar parent PB Fintech lost ₹34,155.78 Cr in market capitalisation over three trading sessions, while Turtlemint shed ₹1,548.96 Cr. 

To note, PB Fintech hit a fresh 52-week low of ₹1,059 earlier today while Turtlemint touched an all-time low of ₹77.50 today only. 

Important to highlight that Turtlemint just made its public markets debut earlier this year in June. The company’s stock is currently trading at about half its IPO price of ₹152. On this, Coverfox’s Jha asked whether IRDAI was aware of the forthcoming changes when it approved Turtlemint’s IPO and, if so, why the listing was allowed to proceed under a framework that could subsequently change the economics of its business and hurt retail investors that participated in the IPO. 

The selling pressure is more broad base and comes at the behest of proposed caps implied significant compression of their distribution economics, with Jefferies estimating that a 10% reduction in new-business commission rates could translate into a 10%-12% decline in earnings.

JM Financial said IRDAI’s proposed distribution reforms could significantly affect particularly banks and NBFCs that have benefited from high commissions since the regulator removed commission caps in FY24. For banks, insurance distribution income rose from 3.5% of PBT in FY23 to 5.1% in FY26, with life insurance accounting for 84% of the income. Multi-tie-up banks are likely to face greater pressure from the proposed caps, while single-tie-up models could see less disruption.

The proposed ban on forced bundling, restrictions on staff incentives and caps on credit-life and motor insurance commissions could reduce both volumes and payouts for NBFCs. 

The post Coverfox MD Sanjib Jha Questions IRDAI’s Insurance Reset, Flags Risk To Rural Penetration appeared first on Inc42 Media.