With insurers now having the flexibility to pay commissions to agents as per the new Irdai regulations on commission and expenses of management, distribution costs of life insurance companies are likely to go up as intermediaries may ask for higher commission for product distribution.
Distribution cost for life insurers, which are not promoted by banks, may see a substantial rise on higher commission payouts, while those promoted by banks are likely to witness a lesser impact. “Distribution cost of life insurance companies will definitely go up due to higher commission payable to intermediaries under the overall cap on expenses of management. Now, as there will be no cap on commission payments in different lines of business, intermediaries may demand more payout as commissions for product distribution. Insurance companies will negotiate, but now the issue is there are nine insurance companies which can tie up with one institution,” a senior official at a life insurance company said.
“Banks, which are promoters or shareholders of insurance companies, will realise the importance of value creation, which will always be substantially more than what will be the commission trade-off. As a result, the impact on such insurance companies might be lesser. However, some other banks, which are not promoters or shareholders of insurance companies, may ask for higher commissions for bancassurance partnerships from those insurers. So, some insurance companies will be willing to pay them more. That is how the life insurance industry will pan out going forward,” the official told FE.
According to industry insiders, insurance companies may need to pay higher commission to agents and intermediaries for pushing new products and more penetration to gain market shares in the competitive environment. “Freeing up of the commission cap raises the question – if this could trigger a ‘commission war’– especially by unlisted players, who have no pressure to show profitability but are focused on gaining market share and get a foothold in the sector. This ‘commission war’-led pressure on listed life and general insurers adds further worry to the listed life and general insurers’ share price that have been under pressure amid a difficult macroeconomic environment and adversely changing regulatory (especially taxation) environment. In this backdrop, insurance stocks will remain range bound despite the valuation turning attractive,” Emkay Global Financial Services said in a note.
Commission payouts by HDFC Life Insurance and Max Life Insurance have been on the higher side among listed players, and hence, they see relatively lower risk from aggressive unlisted players competing, according to the Emkay’s note.
“However, SBI Life and IPRU (ICICI Prudential Life) have enjoyed favourable commission rate and exclusivity in their key banca (bancassurance) channel. Increased banca partnership limit and freeing up of commission would mean that there will be a long list of suitors for the banca partnership of SBI and ICICI Bank, among others, and that might add pressure to either increase commission payouts by SBI Life and IPRU or opening up of their key banca channels, or both,” the note added.
NS Kannan, MD & CEO, ICICI Prudential Life Insurance, said the updated regulations on commission and expenses of management are a welcome change. The increased flexibility in commission limits will allow insurers to react to market forces in a quicker manner, thereby supporting the Irdai’s vision of improving penetration of insurance. “The expenses of management have increased allowability in the later years of the policy while limiting expenses in the initial year. This will persuade insurers to work on improving long-term persistency, which, in turn, will improve the customer proposition as well as the company’s profitability,” Kannan said.
The life insurance industry is moving from a rule-based regulatory regime to a principle-based regulatory regime, said IndiaFirst Life Insurance deputy CEO Rushabh Gandhi. “This augurs well for the industry at large and will play an important role in realising the vision of ‘Insurance for All’ by 2047.”
“Insurance companies will decide on how to manage expenses of management under the overall limit. They have flexibility now on how much they will pay as commission. They may give extra commission to intermediaries when they want to penetrate more. Then they may incur a higher cost. However, they will have to manage the distribution cost within the overall limit on expenses of management,” said Bahroze Kamdin, partner, Deloitte India.