Right direction, uncertain pace

The Insurance Regulatory and Development Authority of India (IRDAI) deserves credit for the consultation paper on the commission structure for intermediaries and insurance companies including a compression of expense of management (EoM) for its intent and stated objectives. The extent of research carried out with four objectives — expanding coverage, improving affordability, enhancing accessibility, and tackling compulsory bundling and mis-selling — is commendable. Let us look at the proposals and their impact on the industry and also some unintended consequences, which the authority should examine before finalising the reform.

The consultation paper makes a fair diagnostic point that the first-year commission on new business runs high at 40-50%, while persistency earns very little; so the incentive rewards sale over quality. There can be no dispute on mis-selling, when one considers the rising complaints. The rationalisation of the commission structure, particularly in life insurance and some general insurance products, is badly required. The EOM compression, especially the speed with which it is proposed, merits debate and may have unintended consequences. Therefore, the direction is sound. The question is speed, calibration, and consequences.

The first possible consequence could be the size of business may shrink. Insurance is a push product and distribution is the engine. If one were to study the reason why global insurers aren’t too excited about entering the insurance market in India, the main factor is the lack of performing distribution partners. All the reputable Indian entities with large customer base — banks, NBFCs, or business houses — already have ties with their respective overseas insurance partners. The reform allowing 100% FDI has not attracted much capital flow as was envisaged or planned. Now, if the distribution channels are not adequately incentivised, the market’s attractiveness will reduce. Also, bancassurance, which accounted for a large part of life insurance company’s annual premium equivalent in FY26, will suffer due to this reform. Banks earned over `14,500 crore in bancassurance commission in FY24, about 2% of their revenue. A first-year payout cut from a 40-50% range to 20-25% changes the economics for banks, brokers, and agents alike. Agents are relatively better placed than banks and brokers but their cash flow will still fall sharply. A phased, product-wise transition would let channels adjust without losing agents in the interim.

The second consequence will be affordability, which could suffer if insurers pass on costs. The consultation paper aims at savings arising out of commission and EOM compression to reach customers. It expects lower premiums, moderated increases, or better returns on savings products. That works for insurers with scale. For those that cannot cut operating costs as fast as commissions, the pressure could show up in pricing or product design. Demand is also fragile. Life insurance new business premium grew around 16% in FY26 after GST exemption, from just 5.7% in FY25 and 2% in FY24. Fiscal measures triggered the growth, which could be undone by any cost-driven pricing.

The third consequence is that investors will have to redo their arithmetic. The FDI law took effect in February with FEMA rules following in May. Foreign partners in existing ventures and those still weighing entry will now revise their assumptions on returns. The profit pool is already thin, outside a few names. In FY26, the life insurance industry earned about `66,000 crore of profit before tax, of which LIC alone earned about `57,000 crore. Nine out of 25 insurers reported losses. A quick evaluation suggests private life insurers earned a margin near 2% and four of them accounted for 83% of that profit. This is possibly a good proxy for the industry’s finances. To be fair, large insurers may gain from the reform. One research report expects lower payouts to support value of net business margins, and LIC and SBI Life are seen as relatively insulated. This could push the insurance-for-all target from 2047 to a latter date.

This also brings us to the industry’s large capital requirement to build capacity to provide insurance cover. Global insurers haven’t rushed in since May. The FDI liberalisation track record — around Rs 20,000 crore of cumulative inflow when FDI was at 26%, Rs 34,000 crore at 49%, and only Rs 27,000 crore at 74% — shows that each relaxation has only progressively brought less capital even when the market value of the capital has grown.

Before elaborating on the fourth consequence, let us evaluate the question of development versus regulations. IRDAI carries a dual mandate, and the outcomes suggest development has taken a back seat. In the last two decades, the authority has focused on the supply side of the market — that is the industry and the products. It has made far less effort to augment demand, which takes us to the fourth consequence — savings are moving elsewhere, and there has been little effort to make insurance affordable through fiscal incentives. Insurance competes for the household rupee. Its share in household savings is gradually declining, with savings moving to the capital markets. If the industry is struggling to distribute and sell, cost compression must not accelerate that shift of retail investors to capital markets.

The consultation paper is seeking responses before it is finalised. Some measures that can soften the impact and yet meet the stated objectives which could deliver the reform are as follows.

The first possibility, with regard to commission and EOM compression, is having a calibrated glide path by scale and vintage so that newer and smaller insurers are not placed in the same bracket as the larger ones, and also the larger ones get adequate time to rebuild their distribution approach. The second step could be sequencing the cuts: Reduce the first-year payouts and raise persistency- or loyalty-linked payouts (in case of general insurance) in steps, and publish a renewal schedule with the caps. The third measure, to go with the first two, would require building in review points (tied to published outcomes as reported by the industry periodically), observing conduct and compliance while simultaneously understanding the industry’s pain, examining complaints and customer feedback, studying dark patterns, and evaluating penetration growth. Then, perhaps, a course correction in the glide path will help both the industry and policyholders.

The reform was seen to be effected on account of mis-selling and heavy costs of providing cover due to acquisition and overheads. However, it demands a balanced approach that ensures investors stay put in the industry and companies see the challenge of commission and EoM compression as an important strategic path.

The writer is Managing Partner, Ashvin Parekh Advisory Services LLP.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.