“The changes would directly affect automobile dealers, OEM-linked brokers, insurers and other motor insurance distributors quite drastically. By reducing upfront earnings from new-vehicle policies and tightening dealer-linked arrangements, the proposals could further compress distribution margins,” said Shailaja Lall, Partner at Shardul Amarchand Mangaldas & Co.
New Delhi: The Insurance Regulatory and Development Authority of India’s (IRDAI) consultation paper introduces a structural reset for the Indian insurance ecosystem by shifting towards an effort-aligned payout framework and capping product-level commissions, according to experts.
The insurance regulator has proposed major reforms in the insurance distribution framework which include a simpler three-tier architecture aimed at lowering costs for policyholders, increasing transparency and strengthening safeguards against widespread mis-selling.
The proposed framework marks a material reset in insurance distribution economics, although we expect the final regulations to be less stringent than the consultation paper in its current form. Sharp cuts in commissions, particularly across credit-life, health renewals/portability and motor, alongside tighter expenses of management(EoM) norms, could disrupt existing distribution models and weigh on near-term growth and profitability, with the impact likely to be more pronounced for insurance brokers, said a report bt Axis Securities.
“Multiple changes across products and channels could require a broader recalibration of business models; however, we believe value of new business (VNB) margins should improve over the medium term as distribution costs normalise. Near-term growth could remain challenged during the transition, while we continue to prefer SBI Life within insurance, ICICI Bank among private banks and SBI among PSUs, given their relatively lower disruption from the proposed changes and more manageable transition to the revised framework.” added the report
Alok Rungta, MD&CEO, Generali Central Life Insurance, said “We are currently evaluating the proposals in detail to understand their implications for the business and the broader distribution ecosystem. There are areas where we will seek further clarity as the consultation progresses. At the heart of our assessment will be how the proposed framework balances distribution efficiency with the need for quality advice, long-term customer servicing and wider insurance penetration. Once we have a comprehensive view, we will work together to co-create a calibrated action plan and engagement approach.”
According to other experts, the intent will certainly help the customers, but this will also cause an immediate margin squeeze for distributors like, bancassurance partners and NBFCs, etc.
“Ultimately, the proposal aims to drive digital adoption, improve policy persistency and create a more sustainable, consumer-first marketplace. As the saying goes, ‘necessity is the mother of innovation’, and these changes will compel companies to be innovative,” said Debashish Banerjee, Partner, Deloitte India.
IRDAI’s consultation paper on ‘Recalibrating the Economics of Insurance Distribution’ proposes capping remuneration for new-vehicle motor insurance at nil for third-party premium and 5 per cent for own-damage and related covers.
It would also bring “technology, awareness and related spends” within the commission ceiling, while replacing the existing Motor Insurance Service Provider (MISP) framework with a broader Insurance Distribution Entity (IDE) regime.
“The changes would directly affect automobile dealers, OEM-linked brokers, insurers and other motor insurance distributors quite drastically. By reducing upfront earnings from new-vehicle policies and tightening dealer-linked arrangements, the proposals could further compress distribution margins,” said Shailaja Lall, Partner at Shardul Amarchand Mangaldas & Co.
The proposals seek to separate insurance sales from other dealer relationships. Dealers would not be permitted to deny cashless repair merely because a customer purchased insurance elsewhere.
At the same time, IRDAI proposes giving customers greater access to alternative digital channels such as Bima Sugam, with dealers required to prominently inform customers about this option at the point of vehicle sale.
“The reforms could, therefore, change the traditional dealer-led model in which insurance sales, vehicle financing and after-sales servicing are closely linked. Revenue pressures may encourage distributors to place greater emphasis on renewals, servicing, technology and other permissible value-added services,” Lall noted.
The final impact, however, will depend on the provisions ultimately adopted by IRDAI and the transition framework accompanying them, said experts.
Ashish Teni, senior specialist, Insurance & Reinsurance, Trilegal,said “IRDAI’s consultation paper represents a considered recalibration of the economics of insurance distribution. The proposed changes to expenses of management, commission structures, distribution architecture, and compulsory bundling are likely to have material implications for how insurers and intermediaries design and price their businesses, with differing consequences across the value chain.”
The real significance will lie in how these principles translate into the final regulatory framework, particularly in addressing the IRDAI’s concerns around distribution sustainability while preserving efficiency, market choice, and commercial viability. The consultation process is therefore critical to ensuring that regulatory intent is converted into a framework that is clear in law, workable in practice, and capable of sustaining a competitive and efficient insurance distribution ecosystem, suggested Teni.
The consultation paper proposes capping general insurance commissions across the board, setting health insurance first-time commissions at 15 per cent to 20 per cent while restricting renewal and porting payouts to just 5 per cent to 10 per cent.
The draft paper limits first-year commissions for distribution entities to between 5 per cent and 20 per cent depending on tenure, down from much higher effective payouts that reached up to 60 per cent when accounting for promotional spends and rewards.
with IANS inputs