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The Insurance regulator, IRDAI, released its much awaited commissions, EOM, and distribution reform consultation paper (read: Part I, Part II) that radically cuts commissions payout across products and has the potential to redefine the insurance manufacturer and distributor business model by even completely destroying some business models.

Some key proposals:

1) Expense of Management (EOM) in Life Insurance to be 15% of GDPI in 2 years and 12.5% in 5 years, and 20% of GDPI in 5 years in case of General Insurance, including SAHI, from existing 30%

2) drastic cut in first-year commissions across Life savings, and term, Health, and Motor

3) prohibition of mandatory bundling of insurance products with loan products and single premium credit life commissions capped at 2%

4) commissions on health renewals and porting cut drastically to 5% in case of distribution entities and 10% in case of agents. ULIP products, agency distribution, and lower-cost banca distribution models are less affected as they see less impact. In this backdrop, SBILIFE, LICI, and STARHEAL will be among the less-impacted, while HDFCLIFE, MAXF, and IPRU will have to get their distribution economics right to comply with the proposed commission and EOM structure. We shall review our estimates and ratings once we get more clarity on the impact of these proposals.

Radical proposals to overhaul distribution and address mis-selling

From proposing sharp reduction in EOM and commissions to addressing the issue of misselling and dark patterns, the consultation paper on “Recalibrating Economics of Insurance Distribution”, sets out a comprehensive framework of reforms covering the insurance distribution, its structure, expenses, commissions, market conduct, transparency, and leveraging digital infrastructure

A reform that is likely to unsettle the growth

The intent behind the proposed reform could be noble, to address the root cause behind mis-selling and also to make insurance more affordable. However, the drastic cut in distribution commission would also make insurance distribution an unviable business and an unattractive vocation. And this could severely backfire, hurting the regulator’s growth agenda and “Insurance for All by 2047”.

SBILIFE and LICI are broadly compliant

SBILIFE with EOM of ~11% and LICI with EOM of ~12% are already compliant with the proposed EOM, and will be required to bring down their EOM to 10% in the next 5 years (Exhibit 3). This shall not be a tough ask for them. Even on the commissions front, they both shall manage the proposal, given SBI’s low commission banca and LIC’s agentdriven business model where the commission compression is lower.

Entering uncharted waters; final regulations likely to be relatively benign

With this radical proposal, the regulator has likely set the base for the final regulations that we believe shall be relatively less strict. However, this proposal pushes the sector in uncharted waters by almost cutting the oxygen (commission) supply to this ‘push sector’. With its ULIP-focused and best cost complaint business, SBILIFE is relatively better off as this proposal is broadly a non-event for the company. LICI is another broadly unaffected entity, as its agency-driven business retains relatively higher commission limits. MAXF, HDFCLIFE, and IPRU will have to negotiate with their distributors to adjust to the lower commission limit in retail products as well as in credit life. GIs and SAHIs may have to reduce commissions, and gliding toward 20% EOM will be a tough ask. STARHEALTH, with its agency driven business model, is relatively better off. PBFINTECH (Not rated)’s business model will come under question as it faces a sharp cut in health renewal and porting commissions, first-year term life commissions, and Motor OD and TP commissions. NBFCs with higher dependency on insurance commissions (LTF, CIFC, MMFS, BAF, etc) will see a material impact on their earnings, if the regulations come in the current form. We will revise our estimates for the insurers and NBFCs once we have more clarity

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