What IRDAI's Proposed Cap On Commission Means For Life, General Insurers

India's insurance regulator has proposed a cap of 20% on the commission paid by life and general insurers to individual agents and insurance intermediaries.

"The proposed expenses of management and commission changes are not too radical,” Emkay Global Financial Services Ltd. said in a note. “[It is] focused more on simplifying the existing regulations as they target merging the multiple category limits and providing more flexibility to insurers as the sector matures," the note said.

The Insurance Regulatory and Development Authority has suggested that the maximum commission or remuneration paid by general insurers and standalone health insurers should not exceed 20% of the gross premium written in that financial year.

For life insurers, limits have been prescribed based on the insurers' ability to cap management expenses.

If the life insurer’s total expenses of management are below 70% of the allowable limits, then it can design its own customized commission structure as per board approved policy or follow the revised limit prescribed by the regulator.

However, if the total expenses exceed 70% of the allowable expenses of management limit, the life insurer is required to comply with the limits proposed by the Insurance Regulatory and Development Authority.

The IRDAI has also proposed a flat 2% commission rate for regular premium or limited premium payment policies depending on their persistency and their renewal beyond five years.

According to Emkay Global, the tweak in the life insurance commission shows that the regulator is focused on bringing down commission on life new business while simultaneously incentivising better persistency, to make life insurance a truly long-term product.

While Motilal Oswal Financial Services Ltd. said the draft benefits life insurance players operating with a lean cost structure as it allows companies with expenses of management at sub-70% of allowable limits to design a customised commission structure as per the board-approved policy. This, the brokerage said, can drive a product mix of choice and boost margins and VNB.

The regulator has invited comments and suggestions by Sept. 14, 2022, on the proposed draft regulations.

Earlier this month, the regulator had also proposed an overall cap on expenses of management incurred by insurance companies.

Brokerage Views

Emkay Global

The draft regulations aim to reduce and merge the large number of expense and commission limits based on product segment and company’s age to much simpler and lesser number of overall limits, Emkay Global said.

Overall expenses of management limits for general and health insurers fall to 30% of gross written premium from about 31-33% (blended) currently.

The regulator aims to reward better persistency for life insurance. Increased the commission cap on renewal to 10% from the existing 7.5%, added some rewards for renewal beyond five years, it said in a note.

The 20% commission and rewards cap on the individual life insurance regular new business might seem like meaningful reduction from the current 15-35% commission and 3-7% additional rewards for agents, the note said. All listed private life insurers, in practice, have been paying less than 20% commission in life regular premium, on overall portfolio basis.

"But the first-year commission cap could compel Life Insurance Corp of India to make some adjustments," the note said, as LIC offers around 27% commission in the first year. As its product mix largely consists of non-ULIP traditional saving products it entails first-year commission to around 30-35% along with rewards of about 6-7% to eligible agents. This could pose a challenge.

The brokerage also expressed concerns surrounding the limits of motor third party insurance. It said that the current commission and rewards put together entail around 18-19% for general insurers, except the motor TP line, wherein commission rates are nil in the first three years and thereafter 2.5%.

"The draft regulation does not mention anything on Motor TP, causing some confusion as a 20% commission cap on Motor TP would mean a material increase in overall commission outgo that does not essentially follow the direction of slightly lower EoM limits," Emkay Global said.

Motilal Oswal

"This [draft regulations] is a step in the right direction as it carries the potential to enhance persistency, cost metrics, and penetration of life Insurance in the country," the brokerage said in a note.

The regulation will usher in greater discipline in the sale of insurance products as it seeks to adequately incentivise agents and insurance intermediaries as commission rates will be linked to persistency rate versus the policy tenure-based payout that prevails currently.

It also benefits players with a lean cost structure.

"On the basis of our interactions, actual EoM for some of the top life insurers are below 70% of allowable EoM limits," the brokerage said. "This introduces flexibility to design a customized commission structure, which can drive a product mix of choice."

For the others with a higher ratio, it will create an aspiration to attain a ratio below 70%, the note said.

Overall, the brokerage expects the new structure to improve penetration and drive higher growth.

SBI Life has the lowest first-year commission rate at 8%, while other private peers operate in the 17-18% range. LIC has a higher rate at 26%. Since most of the smaller players operate at a higher rate, they will be adversely affected if the draft guidelines come into being in its current form, the note said.