The Insurance Regulatory and Development Authority of India’s (IRDAI) latest consultation paper has thrown the insurance sector into turmoil, affecting even insurers’ stocks. But it has a backstory. In 2023, IRDAI removed product-wise commission caps. It let insurer boards set payouts, subject only to an overall expense ceiling. The draft paper released on September 23, "Recalibrating Economics of Insurance Distribution", shows us how boards used that freedom. Between FY23 and FY25, motor premiums grew 34%, while motor commissions grew 259%; in retail health, premiums rose 53% and commissions 118%. On health cover sold alongside loans, payouts to lenders run around 40% of the premium, and about 28% on credit life. So, those who sold the products kept getting richer. For example, for single-premium credit-linked life insurance, a bank's commission on a Rs 1 lakh policy could reach Rs 57,000. Under the draft, the commission on the same Rs 1 lakh policy would be cut to Rs 2,000.
Proposed Commission Caps
Such a drastic reduction might look more like a punishment than a fix. The draft also proposes a ceiling for each insurance category. General insurers’ premium would be cut from 30% to 25% in two years and 20% in five, and life insurers' limit would go down from a single 15% to 12.5%; distribution entities get 20% first-year and 3% renewal on long-term life policies, while agents get 25% and 5%.
Regulatory Gaps
While a lower expense ceiling makes selling insurance cheaper, it does not make buying insurance cheaper. IRDAI can cap what insurers pay but cannot easily regulate how a bank pays its branch staff because the RBI regulates banks. If the RBI does not adopt the same rule, banks can shift the incentive into general performance bonuses. The IRDAI says it wants "same structure, same functions, same norms". But it has set different caps for doing the same work: 25% for an agent and 20% for a bank or broker selling the identical long-term plan. This also suggests it is trying to protect the agent workforce, including the LIC, which has a rather huge agent base.
Insurance Penetration Remains Low
Traditionally, insurance in India is still sold, not bought, and penetration remains below 4 per cent of the GDP. The 2023 liberalisation was justified as a push towards "Insurance for All by 2047". When SEBI banned mutual fund entry loads in 2009, distributors left. Insurance has no equivalent to the systematic investment plan to pull customers in on their own.
Feedback Open Until October 25
Feedback on the draft is open until October 25, and hopefully something more useful, more equal will emerge from the churn. Penalising those who profited from a rule set by the IRDAI itself cannot be justified either. At the same time, a system in which a lender can take nearly half the premium on a policy cannot be defended anyway. Hence, some proposals are good in spirit, but their implementation needs to be calibrated so that insurance companies feel justified in being in the business and the customer is not short-changed too.
