The Insurance Regulatory and Development Authority of India (IRDAI) has put forth new proposals for insurance distribution rules, sparking concerns across the industry. These proposed changes would reintroduce stringent commission caps, a move that experts believe could significantly alter the financial viability of selling low-premium insurance policies.
New Rules Impact Low-Ticket Policies
Under the new framework, distributors of low-value policies, such as two-wheeler insurance, face significantly reduced commissions. Indraneel Chatterjee, COO and Co-Founder of InsuranceDekho, highlighted this issue with an example: an ₹800 two-wheeler own-damage policy would yield a mere ₹40 commission for the distribution entity at a proposed 5% cap. This figure is before accounting for the economics of Point of Sales Person (PoSP) networks, which are crucial for reaching customers on the ground.
Chatterjee warned that such low payouts could make it difficult to sustain distribution networks for these policies, rendering the segment less attractive for agents and PoSPs. This could exacerbate the existing problem of low insurance penetration, especially given that approximately 60% of two-wheelers in India are currently uninsured. A sharp drop in commissions for third-party insurance could further weaken incentives to distribute these essential policies.
IRDAI's Proposed Commission Structure
The consultation paper on ‘Recalibrating Economics of Insurance Distribution’ outlines specific caps:
- Motor Own-Damage/PA/LL Products: 5% cap for Insurance Distribution Entities (IDEs) and 10% for agents or associates.
- New-Vehicle Third-Party Insurance: Nil commission for IDEs, and 2.5% for agents/associates.
These proposals mark a return to hard commission limits, which were previously removed under the 2023 Expenses of Management framework.
Shifting Landscape for Insurtechs and NBFCs
Hanut Mehta, CEO of BimaPay, suggested that these reforms would fundamentally reshape insurance distribution, particularly for online platforms. He believes the changes will distinguish insurtech models built on customer value from those solely reliant on commissions. Mehta anticipates new opportunities emerging in payments, renewals, servicing, policy management, and claims support, especially with the rise of market infrastructure institutions like Bima Sugam.
Non-Banking Financial Companies (NBFCs) are also expected to feel the pressure on their fee income. Capitalmind CEO Deepak Shenoy noted that the proposals aim to cap commissions as a percentage, spread payouts over policy terms, and reduce the influence of large distribution intermediaries. While acknowledging potential short-term pain for some players, Shenoy views this as a positive long-term step towards aligning insurance commission regulation with other financial products.
Jefferies estimates that the proposed norms could lead to a 50–66% cut in commissions from FY28 onwards, significantly impacting NBFCs that rely on insurance distribution for a portion of their fee revenue.
The central question for the insurance industry remains whether lower distribution costs can be achieved without making low-value policies commercially unattractive to the very agents and PoSPs vital for their sale and overall market penetration.