Financial Services : IRDAI Tightens Distribution Norms by Shreya Khandelwal Vice President -Institutional Research PL Capital
The consultation paper released by IRDAI prescribes steep commission cuts and tighter EoM norms for life insurers. While these regulations are VNB positive over the long run, we expect some weakness in near-term growth as lower commissions in savings and credit life is likely to be a drag. We expect companies to push for growth in retail protection, led by individual agents where commission cuts are not as sharp. We retain a positive stance on life insurers with some clarity on new commission guidelines. SBI Life pays the lowest commission among our coverage and is best placed to ride the uncertainty. We continue to prefer MAXF as our top pick, backed by a strong proprietary channel. Large NBFCs remain most exposed, with 3-26% of FY26 PBT coming from insurance income.
Tighter caps on commissions and EoM:
IRDAI has released a consultation paper on distribution guidelines proposing tighter commission and Expense of Management (EoM) caps to bring down costs. Some of the key changes are:
• Lower EoM ceiling: The proposal sets a target of 15% EoM for life insurers within 2 years and 12.5% within 5 years.
• Commission to include all kinds of payments: The definition captures all cash and non-cash payments including incentives, awards, reimbursement of expenses, brand payments to related parties or distributors. Volume/ reward-linked incentives for bank and NBFC staff on selling insurance are prohibited.
• Three categories of distributors: IRDAI has consolidated various types of distributors into three categories (1) Insurance Distribution Entities (IDE) (2) Insurance Distribution Persons (IDP) and (3) Market Infrastructure Institutions (MII).
• Commission caps to be enforced: Product-level caps have been proposed which are significantly lower than current commissions. Cuts are highest for IDEs (mainly banks/ NBFCs) and credit life products (exhibit 3 and 4)
• Stricter enforcement of guidelines: Cost audits are mandatory for every insurer and distribution entity with insurance revenue above INR 1 bn; entities above INR 500 mn need to publish revenue, expenses, related party payments and PAT.
Our sensitivity analysis suggests an improvement of 60-190 bps in commission ratio with cuts ranging from 10%- 30% in the banca channel for HDFC LIFE for FY25/ FY26.
Large NBFCs earn ~3-26% of PBT from insurance commission (exhibit 8). CIFC, HDBFS and LTFH are likely to see a higher impact on profitability. Apart from tighter commissions on credit life products, compulsory bundling of insurance with loans is also prohibited, reducing the opportunity for cross-sell.
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