Insurance Stocks Come Under Pressure Over Proposed Commission Limits, IRDAI Targets Stronger Policy Renewals

New Delhi: Insurance shares fell sharply on Thursday after the Insurance Regulatory and Development Authority of India (IRDAI) proposed commission caps for life insurance policies. Insurance and related stocks declined between 10% and 20%, according to IANS.

The draft aims to reduce the emphasis on upfront payouts to sellers and encourage them to help customers continue paying premiums over several years. The proposals remain subject to consultation.

Proposed commission caps

IRDAI’s suggested limits vary by premium payment term, or PPT, and distinguish between distribution entities and agents. For policies with a PPT shorter than five years, the proposed caps are 5% for entities and 6.25% for agents.

At five years, the respective limits rise to 10% and 12.5%. For payment terms of six to eight years, they would be 14% and 17.5%. Nine-year policies carry proposed caps of 18% and 22.5%, while terms of at least 10 years have limits of 20% and 25%.

These bands cover individual linked and non-linked life insurance policies. The regulator also suggested lower payouts for certain single-premium products and policies carrying tax incentives.

What changes for policy sellers?

For individual savings policies bought with one premium payment, first-year commissions would be limited to 1% for distribution entities and 2% for agents. For single-premium pure term policies, the proposed ceilings are 7.5% and 10%, respectively.

The consultation paper says commission calculations should include incentives, awards, reimbursement of selling expenses and non-cash benefits. This would bring forms of distributor compensation within the proposed limits.

The regulator wants payment structures to reward continued service rather than focus chiefly on the first premium. Policy persistency measures whether customers keep their insurance cover active by making subsequent payments.

The fall in insurance stocks signals concern about possible changes to distribution arrangements. The proposals could be revised after consultation and do not immediately alter existing commission arrangements.