A Bill, which seeks to strengthen the regulatory powers of insurance sector regulator Irdai, was passed by the Lok Sabha on Tuesday. The Sabka Bima Sabki Raksha Bill, which was introduced by Finance Minister Nirmala Sitharaman earlier in the day, also allows 100% foreign direct investment (FDI) in the sector.
The proposed law allows capping of commission payouts and tighter management expenses norms. Shares of most insurance companies fell after the Bill was presented in Parliament. While ICICI Prudential Life Insurance led the losers with a 1.89% drop, Star Health and Allied Insurance was down 1.52%, GIC 1.28%, Go Digit 1.03% and HDFC Life Insurance fell 1.01%.
Shares of PB Fintech
Digital insurance intermediaries such as Policybazaar parent PB Fintech and InsuranceDekho, which rely heavily on variable commission structures for distribution, are expected to be hit hard. Shares of PB Fintech closed 5.4% lower at Rs 1,820.60 on the BSE.
The Bill proposes amendments to the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the Irdai Act, 1999. The key proposal to raise the FDI limit in insurance to 100% from 74% is aimed at unlocking the sector’s full potential by attracting more stable foreign capital and technology, eliminating the need for mandatory Indian joint venture partners, and ultimately boosting national insurance penetration.
Tapan Singhel, managing director and CEO, Bajaj General Insurance, and chairman of General Insurance Council, called the Bill a significant reform. “Overall, the Bill is expected to widen insurance coverage, bring more citizens under the insurance safety net, and spur sectoral growth while strengthening policyholder protection,” he said.
Changes proposed by the bill
Among other changes, the Bill removes provisions relating to commission, remuneration and rewards for agents and intermediaries from the statute, vesting explicit authority with the insurance regulator to regulate distributor remuneration through subordinate regulations.
“This should bring greater clarity and consistency in how distribution expenses are managed across the industry,” said a senior executive at a private life insurer. “At present, insurers operate within overall expense limits, but commission structures vary widely.”
Under the current regulatory framework, Irdai does not prescribe specific commission ceilings for agents or distributors or across product categories. Instead, it regulates costs through overall limits on expenses of management, which include commissions, rewards, marketing and other acquisition costs, expressed as a percentage of premium collected during the year.
“Insurers are required to frame board-approved commission and remuneration policies to ensure payouts are reasonable, aligned with policyholder interests and compliant with EoM (expense of management) limits,” the executive added.
Under Irdai’s Expenses of Management, including Commission, of Insurers Regulations, 2024, the overall EoM is capped at 30% of gross written premium for general insurers and 35% for standalone health insurers. For life insurers, EoM is calculated on a segmental basis across product categories such as pure protection and annuities, with higher allowances for rural business and government-backed schemes.
Industry bodies, however, cautioned against interpreting the amendment as an immediate cap on commissions. Narendra Bharindwal, president of the Insurance Brokers Association of India (IBAI), said the move merely strengthens Irdai’s statutory authority. “The amendment does not abruptly cap distributor commissions. It empowers Irdai to regulate remuneration across all distribution channels in a transparent and consultative manner. This is not anti-agent or anti-intermediary,” he said.
Currently, first-year commissions in life insurance can range from 40% to as high as 90% of the first-year premium, depending on the product.
“The ability to rein in distributor commissions could help offset the impact of recent GST changes, though the real effect will depend on the final regulations,” said a senior executive at another private general insurer.
Earlier this year, the government exempted individual life and health insurance policies from 18% GST. While reinsurance premiums were also exempted, insurers can no longer claim input tax credit on operating expenses and commission payouts, as insurance products have been fully GST-exempt since September 22. Since then, life and health insurers have been renegotiating commission structures with distributors to mitigate the impact of the loss of input tax credit.
Industry players also said several provisions of the Bill, including the revised definition of insurance business, need greater clarity. The Bill proposes to allow insurers to enter into non-insurance contracts, raising questions over whether this extends to non-insurance value-added services or is limited to activities ancillary to insurance. The prohibition on common directors between insurance companies and banking companies or financial institutions is another area that requires further clarity, they said.
The absence of provisions enabling an open-architecture distribution model is another concern for agents. The Bill does not provide for open architecture, meaning agents are likely to continue operating under the existing tie-up framework, under which they can represent one life insurer, one general insurer and one standalone health insurer at a time.
The Bill also empowers Irdai to frame new investment regulations, allowing insurers to deploy funds in a wider range of asset classes subject to regulatory approval. However, the existing safeguards remain unchanged. Life insurers must continue to invest at least 50% of their controlled funds in government securities or other approved securities. General insurers, meanwhile, are required to invest 20% of their controlled funds in central government securities and 10% in state government securities. “If this overall requirement is reduced to 25%, investment yields could improve meaningfully,” said an industry executive.
–With inputs from Geeta Nair