India’s life and general insurers expect less stringent commission rates in the final guidelines, along with a phased implementation of the proposed reforms and scale-based limits on expenses of management (EoM).
Alok Rungta, MD & CEO, Generali Central Life Insurance said the proposed framework is a significant development for the insurance industry and reflects the regulator’s continued focus on strengthening governance, transparency and sustainable growth. Given the scope of the proposed changes, he said, insurers would need adequate time to assess the implications across products, distribution models and operating structures.
“A phased implementation approach could help facilitate a smooth transition for the industry,” Rungta added.
Irdai on Wednesday proposed bringing back hard caps on commissions based on the segment, line of business, distribution channel, product complexity, and the effort involved in selling and servicing policies. The paper proposed sharp cuts in product-wise commissions, including a reduction in term insurance commissions to 25-30% from 51%, health insurance to 15-20% from 24%, motor insurance to 0-15% from 26%, and savings insurance plans to 5-25% from 14-37%.
Rungta said a one-time implementation of these changes would be difficult, given the diversity of insurers’ business models, distribution mixes and cost structures. Adequate time to adapt, he added, would support the effective adoption of the new framework.
Industry players also want Irdai to adopt scale-based limits on expenses of management. The draft proposes linking EoM limits to gross direct premium income (GDPI), with the cap for life insurers declining to 15% within two years and 12.5% within five years, from the current overall limit of 30-35%. For general insurers, the EoM limit is proposed to decline from 30% of gross written premium (GWP) to 20% of GDPI over five years. For standalone health insurers, the limit would fall to 30% from 35%.
“This is one point which we would like to take up with the regulator, especially the EOM percentage being the same for all players may not be the right way to go, because the smaller and mid-level players might have to incur more expenses even to grow business,” said Krishnamoorthy Rao, MD & Chief Executive, Generali Central Insurance.
“We would request the regulator to have different EOM percentages depending on the size of the companies,” Rao said.
Smaller insurers and new entrants typically incur higher upfront costs to attract and retain agents, acquire customers, and build their brands compared with established players. “Treating large, small, everybody with the same brush. It’s just not sustainable. You have to recognize the different stages of evolution of business,” said a chief executive of a private life insurer.
The executive said Sebi’s approach to mutual funds could serve as a model, with smaller players allowed higher expense ratios that gradually decline as they scale up. This, the executive said, would give smaller insurers the time and headroom to build their businesses before moving to lower expense ratios as they grow.
A top executive in the general insurance industry said the proposed commission cuts were much steeper than industry expectations. “Perhaps, Irdai want to understand the industry and public feedback. We expect the final regulations to be less stringent than the consultation paper in its current form,” he said.