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Massive regulatory changes to have significant ramifications

IRDAI's Sep’26 consultation paper, "Recalibrating Economics of Insurance Distribution", is the most significant proposed overhaul of distribution regulation since the 2023 Expenses of Management (EoM) reforms. The 2023 reform removed hard commission caps and moved to an entity-level EoM ceiling computed on gross written premium (GWP) with the board’s discretion, whereas this consultation paper proposes to reintroduce hard commission caps, tighten EoM computation, and collapse a fragmented eight-category distributor architecture into three types – insurance distribution entities (IDE), insurance distribution person (IDP) and market infrastructure institution for insurance (MII).

Most significant takeaways

* Distributor types reduced to three from eight: Corporate agents, brokers, IMFs, web aggregators, MISPs, etc. all collapse into IDE, IDP and MII. Entry capital is cut to INR1m, and registration is permanent. Easier entry = More competition.

* Hard commission caps are back: 2023 removed caps; this reverses that. Motor TP: near-nil for IDEs. Health first-year capped 15-20% (IDE/agent). Life 10yr+ PPT: 20- 25% first year, just 3-5% renewal.

* EoM glide path tightens materially - Life: 15% in 2 years then 12.5% of premium in 5yrs. General: 25% in 2 years then 20% of GDPI in 5yrs. Computed on GDPI (not GWP), closing the reinsurance loophole. More importantly, earlier GI and HI were separate categories with 30% and 35% limits, now both have to go down to 25% in 2 years.

* Bancassurance in the crosshairs: Multi-bank tie-ups pay 33% avg commission vs. 13% for single tie-ups (IRDAI's own data). Expect compression + mandatory bankcommission disclosure.

* Brokers/aggregators face cap squeeze: Broker commissions rose 8.5%/17% of premium over FY23-25. Open-architecture IDEs get lower caps than closedarchitecture agents - a direct disincentive for the broking model.

* Insurance-only wall comes down: IDEs/IDPs can now sell non-insurance financial and non-financial products. Net positive for cross-selling-led platforms; insurance economics still capped.

* Motor dealers/MISPs must register as IDEs: Mandatory IDE/PoSP tie-up, cashlessrepair-denial banned, OEM incentive-linked agreements banned. Commission grew 259% vs. 34% premium growth over FY23-25.

* Compulsory loan-insurance bundling banned: Only defined "acceptable packages" allowed (disclosed commission, separate payment, no forced insurer choice). MSME property cover INR50m cap removed.

* Mandatory cost audits + public disclosure: All insurers + IDEs with >INR1b commission income and IDEs with >INR500m revenue must disclose revenue/expenses/related-party payments publicly. Our view: Revenue of insurance brokers and banks/NBFCs will be hit more than that of individual agents; hence, the impact on banca-heavy insurers, especially on open architecture, will be higher. Multiple changes in the proposed regulations will call for significant overall changes in the way businesses are carried out across products and channels. We believe VNB margins and combined ratios for insurers will improve over the medium term; however, business growth in the shorter term could face challenges given disruption in many channels. Our preferred picks in life insurance continue to be SBI Life and Canara HSBC Life as we see relatively easier transition for them to new EoM limits. LIC will also be relatively better placed given its relatively low dependence on brokers and banca channel.

* Life Insurers - VNB margin benefits but near-term growth could be slow With a significant reduction in distribution costs, we expect product-level profitability to improve for life insurance players. On the other hand, business volumes could be impacted in the medium term, with credit life business in particular could see some stress. Meanwhile, intense competition in open architecture banks could taper off.

*General/Health insurers - profitability definitely improves with lower costs Motor business will go through a sea change with several measures announced. However, with commissions going down on Motor TP and prices unchanged as the segment is tariffed, the profitability of the segment will improve. In the health segment, credit-linked product growth could be a challenge. Overall, we still expect combined ratios to improve on a slower growth.

* Distributors - biggest impact Distributors are likely to face the biggest impact if the regulations are implemented as they are. Take rates could go down meaningfully, especially on new health business and motor TP business.

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