Insurance Sector Update: Insurance Act様imited proposals, no immediate impact by Kotak Institutional Equities
Insurance Act—limited proposals, no immediate impact
The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, tabled in the Parliament, paves the way for the merger of Axis Max Life and Max FS and allows 100% FDI in insurance. Even as concerns on commission caps put pressure on PB Fintech—a reinforcement clause, we don’t see any immediate impact of the same.
Paves way for merger of insurance and non-insurance companies
The Amendment of Insurance Laws provides an enabling provision for the merger of insurance and non-insurance companies, subject to approval from the IRDA. Section 35 of the Insurance Act had restricted mergers between an insurance company and a non-insurer. The change will make way for mergers of insurance companies with their holding companies. The Street is keenly looking forward to the merger of Max FS with Axis Max Life and Shriram GI with its holding company. Axis Bank has to make a decision now on when they want to go ahead with the same.
Increase in FDI cap to 100%—will new players enter?
The amendment increases FDI in the insurance sector to 100%, from the current limit of 74%. While new foreign majors and niche players may enter the space, we find limited impact on the life insurance business given the long gestation periods and challenges in distribution for new players, especially those without banca tie-ups. The insurance sector was liberalized in 2000, prior to which there were only six public insurers in the country. By FY2008, the number of insurers increased to 36 and 47 by FY2010. The FDI limit was raised to 49% in FY2015 and 74% in FY2021, but the number of insurers stands at 61 (FY2025), up from 52 in FY2015, a rise of 17% over 10 years (see Exhibit 1). The business still remains concentrated, with the top six life players contributing 78% of APE in FY2025 (see Exhibit 2). We do, however, believe that non-life companies that have lower barriers to entry may see more competition or entry of niche players. Minimum capital (net owned funds) requirement is prescribed at Rs1 bn for insurance business and Rs2 bn for reinsurance business.
The proposal on commission caps
The proposal on commission caps likely put pressure on PB Fintech’s stock on Tuesday. According to the amendment, IRDA may specify the limits of any commission, remuneration, or reward to insurance agents or insurance intermediaries as may be necessary. Commission caps have been ineffective at regulating economics between insurance companies and distributors. IRDA removed commission caps and business line-level cap on expenses of management (EoM) and prescribed company-level EoM caps in 2023. Exhibit 3 shows a sharp rise in bancassurance and broker commission rates during FY2024-25 for most private life insurers. This likely reflects the true economic reality, which was masked earlier.
IRDA may anyway have leeway to fix the cap, and this clause just reinforces the same, in our view. The regulator may independently reevaluate expenses and payout structure from time to time.
Open architecture and composite license skipped in the amendment
Unlike expectations, the bill did not provide for open architecture in the agency business, providing much needed relief to life insurers. Insurance companies, over the past few years, have been investing heavily in expanding franchise and agents and tighter control over agents encourages the same.
While composite license (common license for life, general and health) was highly speculated earlier, the bill does not provide for the same; IRDA is, however, now empowered to introduce another class of insurance. There were concerns about life companies entering the challenging and crowded health business, to diversify customer offering.
Other changes
- Record keeping. The proposed bill mandated insurers to maintain comprehensive records of policies and claims, including KYC details (Aadhaar, PAN, etc.). Policies above a specified threshold of sum assured and premium need to be issued in the electronic form.
- KYC processing. The bill empowers IRDA to set up KYC guidelines for insurers and regulated entities. Disclosure of policyholder information to third parties is allowed if it is mandated by law, in public duty, or with customer consent.
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