Shares of insurance stocks including HDFC Life, SBI Life, ICICI Prudential Life, LIC, ICICI Lombard and PB Fintech crashed on Thursday, September 24, following a set of proposed insurance distribution reforms by the Insurance Regulatory and Development Authority of India (IRDAI).
TurtleMint was the top loser, hit its 20% lower circuit of ₹109.10. Meanwhile, PB Fintech also hit its 10% lower circuit of ₹1,701.00. ICICI Prudential Life Insurance tanked 7.6% to day’s low of ₹448. Meanwhile, HDFC Life crashed 5.6% to ₹530.15, SBI Life shed 3.2% to ₹1,700, ICICI Lombard fell 2.5% to ₹1,466.05, and LIC was down 2% at ₹399.
The regulator has proposed changes covering Expense of Management (EoM) limits, commission structures and safeguards against mis-selling. The framework includes lower EoM limits and separate caps on commissions based on insurance products and distribution channels.
The proposed rules could reshape insurers’ distribution expenses and the way commissions are structured across channels. IRDAI has also put emphasis on digital and more transparent insurance purchases.
What is IRDAI proposing?
The proposed framework seeks to align insurance commissions with the complexity of a product and the effort involved in selling it, while introducing separate caps across products and distribution channels.
For products sold through an “open architecture” model, including those distributed by brokers and banks, the paper proposes lower commission levels. Banks and brokers are major distribution channels for health, motor and life insurance.
The regulator has proposed little to no commission for mandatory covers such as third-party motor insurance. For banks and lenders that sell insurance alongside loans, commissions would be restricted to 2% to 5%, depending on the type of product. The proposals also seek to prohibit the mandatory bundling of insurance with credit.
IRDAI has suggested a tiered commission structure for individual life insurance policies, with the proposed payout limits linked to the length of the premium payment term (PPT). The framework would apply to both linked and non-linked policies.
For policies with a premium payment period of under five years, distribution entities would be eligible for a maximum first-year commission of 5 percent, while the cap for agents would be 6.25 percent. Where the premium payment term is five years, the proposed limits would increase to 10 percent for distribution entities and 12.5 percent for agents.
The commission ceiling would rise further with longer payment periods. For PPTs of six to eight years, the proposed caps stand at 14 percent for distribution entities and 17.5 percent for agents. The limits would increase to 18 percent and 22.5 percent, respectively, for a nine-year payment term, and to 20 percent and 25 percent for policies with a PPT of 10 years or more.
The proposed structure reflects IRDAI’s broader objective of encouraging distributors to focus on policy persistency rather than prioritising new policy sales. According to the consultation paper, the commission framework should encourage distributors to help policyholders continue with multi-year premium commitments instead of creating incentives centred on first-year payments.
The regulator has also proposed lower commission levels for single-premium policies and insurance products that offer tax-related benefits.
For individual pure-term insurance, the proposed commission would vary depending on the premium payment structure. In the case of single-premium term policies, first-year commission would be capped at 7.5 percent for distribution entities and 10 percent for agents.
For term policies where premiums are paid over multiple years, the proposed first-year commission ceiling would be higher at 25 percent for distribution entities and 30 percent for agents. Renewal commissions under these policies have been proposed at 7.5 percent for distribution entities and 10 percent for agents.
In health insurance, distributor commissions at the time of a new policy purchase would be capped at 15% to 20%. A lower commission range of 5% to 10% has been proposed for policy renewals and for customers porting their policies to another insurer.
For motor insurance, commissions on personal accident cover would be capped at 5% to 10% under the proposed rules.
IRDAI has invited stakeholders to submit feedback on the proposals by October 25, after which the regulator will finalise the framework.
Disclaimer: This story is for educational purposes only. Please consult with an investment advisor before making any investment decisions.
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