Decoding The Commission Caps That Sparked A Bloodbath In Insurance Stocks

For insurance distributors, the commission earned on every policy is central to their business model. It determines how much they can spend to acquire customers, the products they prioritise, and the economics of their partnerships with insurers.

This equation may now change.

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a sweeping overhaul of the insurance distribution ecosystem in its consultation paper ‘Recalibrating Economics Of Insurance Distribution’.

The proposals come more than three years after IRDAI removed product-wise commission caps in April 2023 and shifted to an expenses of management (EoM) framework, giving insurers greater flexibility in determining distributor payouts.

However, the regulator now believes that commissions and other distributor payments have risen disproportionately and is proposing to bring back product-level ceilings, tighten insurers’ overall expense limits, and scrutinise indirect incentives.

The scale of the potential disruption was reflected in the stock market today. Shares of Policybazaar parent PB Fintech ended the session 35.98% lower at ₹1,210 apiece on the BSE.

Turtlemint shares remained locked at the 20% lower circuit, ending at ₹109.10 apiece. The stock also touched its lowest level since the insurtech company’s listing in June. HDFC Life Insurance Company’s shares plunged 6.13%, while those of ICICI Prudential Life Insurance fell 4.23%.

Brokerages said the proposed limits could sharply compress the economics of insurance distribution, particularly in categories where prevailing payouts are far above the suggested caps.

For insurtechs and other insurance distributors, the changes could affect revenue from health, motor, and life insurance policies. They may also force platforms to rethink customer acquisition expenditure, insurer partnerships, sales incentives, and product prioritisation.

However, the impact would vary widely across products and distribution channels.

The Commission Reset: From Flexible Payouts To Product-Wise Caps

The biggest proposed change is the return of product-level commission limits. IRDAI has suggested separate ceilings based on the insurance segment, distribution channel, product complexity, and effort involved in selling and servicing a policy.

Under the proposed framework, open-architecture insurance distribution entities (IDEs) would include insurance brokers such as Policybazaar and Turtlemint’s insurance broking arm, as well as banks and NBFCs registered as corporate agents. Since these entities can distribute products from multiple insurers, they would generally face lower commission ceilings than individual agents and other associates operating under closed architecture. 

For general insurance, the proposed caps include:

• New-vehicle third-party motor insurance: Nil for IDEs and 2.5% for agents and associates.
• New-vehicle own-damage, personal accident, and legal liability insurance: 5% for IDEs and 10% for agents and associates.
• Old-vehicle third-party insurance: 2.5% for IDEs, 5% for agents and associates, and 2.5% for garages.
• Old-vehicle own-damage, personal accident, and legal liability insurance: 10% for IDEs, 15% for agents and associates, and 10% for garages.
• Individual health insurance: 15% for IDEs and 20% for agents on new policies. The proposed limits fall to 5% and 10%, respectively, for renewals and ported policies.
• Group health insurance: 2.5% for IDEs and 5% for agents, subject to monetary ceilings of ₹100 Lakh. Hospitals would face a 1% cap, subject to a ₹25 Lakh ceiling.
• Marine cargo insurance: 10% for IDEs and 15% for agents.
• Marine hull insurance: 10% for both IDEs and agents.
• Miscellaneous retail insurance: 15% for IDEs and 17.5% for agents.
• Miscellaneous corporate and group insurance: 10% for IDEs and 15% for agents.

For risks below ₹500 Cr, IDEs could earn commissions of up to 7.5%, while agents could earn up to 10%. These limits would fall to 6.25% and 7%, respectively, for risks between ₹500 Cr and ₹2,500 Cr, and to 5% and 5.5% for risks above ₹2,500 Cr.

The framework is based on the effort required to sell and service a product. Mandatory or near-mandatory products would attract nil or low commissions, while products requiring greater selling and servicing efforts would have higher ceilings.

Why Motor Insurance Faces A Bigger Reset 

Motor insurance is among the segments likely to be most affected. IRDAI’s analysis found that motor insurance currently carries an average commission rate of 24%, with payouts ranging from 13% to 50%.

Motor insurance commissions increased 259% between FY23 and FY25, compared with a 34% rise in premiums during the period.

The proposed ceilings, particularly the nil commission for IDEs selling third-party insurance for new vehicles, could therefore weigh on distributors with significant exposure to motor insurance.

It may also reduce the ability of distributors to subsidise customer acquisition or offer incentives using the high commissions generated from own-damage and bundled motor policies.

What Changes For Health Insurance

The difference between prevailing payouts and the proposed ceilings is also significant in health insurance, which is among the most important categories for digital insurance distributors.

IRDAI has proposed limiting commissions for IDEs to 15% of the premium on new individual health insurance policies and 5% on renewals and portability. Agents would be permitted commissions of up to 20% on new policies and 10% on renewals and portability.

Jefferies said new-business health insurance commissions could decline to 15%-20% from more than 30%, while renewal commissions could fall to 5%-10%.

The sharper ceiling on renewals could particularly affect distributors that have spent heavily to acquire policyholders on the expectation of earning recurring commissions over multiple years.

Platforms may consequently have to lower acquisition costs, charge separately for some services, or generate more revenue from claims assistance, technology, lending, and other financial products.

What Changes For Life Insurance

For individual non-linked and linked life insurance policies, the proposed first-year commission limits would range from 5% to 20% for IDEs and 6.25% to 25% for agents, depending on the premium payment term.

For policies with a premium payment term of at least 10 years, the proposed caps would be 20% for IDEs and 25% for agents. Renewal commissions would generally be lower, with a maximum ceiling of 7% for these policies.

Other proposed life insurance commission limits include:

• Individual pure-term, single-premium policies: 7.5% for IDEs and 10% for agents.
• Individual pure-term, multi-year policies: 25% for IDEs and 30% for agents in the first year, followed by renewal caps of 7.5% and 10%, respectively.
• Group pure-term, single-premium policies: 1.5% for IDEs and 2% for agents, subject to monetary ceilings.
• Single-premium pension, deferred annuity, and immediate annuity policies: 0.5% for IDEs and 0.75% for agents.
• Annuities purchased using NPS proceeds: Nil commission.
• Loan-linked individual pure-term policies: 2% for single-premium policies and 2.5% in the first year for multi-year policies, with a 1% renewal cap.

The low ceilings proposed for loan-linked insurance are significant for banks, NBFCs, and embedded-insurance distributors, which frequently sell such policies when issuing loans.

Citi identified credit-linked insurance as one of the most vulnerable categories. According to the brokerage, payouts for group credit life insurance have risen to nearly 45%, while commissions in NBFC-led channels average around 42%.

Bringing these payouts down to the proposed levels would therefore involve a far steeper reduction than the headline commission caps suggest.

It Is Not Just About Commissions

IRDAI has also proposed lowering insurers’ overall EoM limits, which cap the share of premiums that insurers can spend on commissions and other operating expenses.

For life insurers, EoM would have to fall to 15% of gross direct premium income within two years and 12.5% within five years. For general insurers, the proposed ceiling would decline to 25% within two years and 20% within five years.

The regulator said the existing framework has failed to deliver sufficient cost discipline.

The proposals would also increase regulatory scrutiny of insurers and distributors.

All insurers would have to undergo cost audits covering expenses and payments to intermediaries. IDEs with annual insurance-related revenue exceeding ₹100 Cr would also require cost audits, while those with revenue above ₹50 Cr would have to disclose financial information, including revenue, expenses, related-party payments, and PAT.

IRDAI also wants to simplify the distribution structure into three categories: insurance distribution entities (IDEs), insurance distribution persons (IDPs) and market infrastructure institutions (MIIs).

IDEs would have a proposed minimum capital requirement of ₹10 Lakh and could operate under an open architecture, allowing them to distribute products from multiple insurers. Distributors would also get greater flexibility to undertake other permitted financial and non-financial activities.

For digital insurance, MIIs such as Bima Sugam could serve as neutral digital marketplaces where customers compare and purchase policies. The proposed Public Insurance Registry (PIR) would support policy discovery, verification, portability, transparency, and grievance redressal.

This could change how insurtechs acquire customers. If more customers discover and buy insurance through common digital platforms, distributors may have to compete more on technology, service and product discovery rather than customer access alone.

Tighter Rules To Curb Mis-Selling 

The consultation paper also targets practices that may encourage forced or unsuitable insurance sales. Banks and NBFCs registered as IDEs would not be allowed to compulsorily bundle insurance with loans or other financial products.

If a lender offers a lower interest rate to customers buying insurance, it would have to disclose the interest rates available with and without the policy. Customers would also have to be allowed to choose another insurer.

IRDAI has also proposed restrictions on incentives for bank and NBFC employees selling insurance, including foreign trips, luxury gifts, milestone bonuses, and contest rewards.

Each policy would have to be linked to the salesperson or agent responsible for the sale. The regulator has also proposed making mis-selling information available through the PIR and allowing insurers to claw back commissions in such cases.

The immediate risk for insurance distribution platforms is lower revenue per policy in segments where commissions are currently well above the proposed ceilings. 

The sell-off in PB Fintech and Turtlemint reflects the market’s initial assessment of this commission gap. However, the final impact will depend on whether IRDAI retains the proposed ceilings following industry consultations or softens them in response to the pushback anticipated by brokerages.

The proposals are not final. IRDAI has invited comments from stakeholders until October 25, following which the final framework will determine their impact on insurance distributors and their business models.

The post Decoding The Commission Caps That Sparked A Bloodbath In Insurance Stocks appeared first on Inc42 Media.