IRDAI's proposed commission cuts may disrupt insurance business models: Emkay

The insurance regulator's proposed overhaul of commissions and distribution expenses could significantly alter the economics of India's insurance industry, with insurers, distributors and NBFCs facing pressure to restructure their business models, according to a report by Emkay. 

The Insurance Regulatory and Development Authority of India (IRDAI), in its much-awaited consultation paper titled Recalibrating Economics of Insurance Distribution, has proposed sweeping changes to commissions, expenses of management (EOM) and distribution practices. The proposals aim to curb misselling, improve transparency, and make insurance more affordable. The consultation paper remains open for stakeholder feedback until October 25, 2026. 

According to Emkay, the proposed regulations could fundamentally reshape the business models of insurers and distributors, potentially making some existing distribution models unviable. 

Among the key proposals is a reduction in the EOM limit for life insurers to 15% of gross direct premium income (GDPI) within two years and 12.5% within five years. For general and standalone health insurers, the regulator has proposed reducing the EOM limit from the existing 30% to 20% over five years. 

The consultation paper also proposes sharp cuts in first-year commissions across life savings, term insurance, health and motor insurance products. It seeks to prohibit mandatory bundling of insurance with loans and cap commissions on single-premium credit life policies at 2%. 

For health insurance, renewal and portability commissions would be capped at 5% for distribution entities and 10% for individual agents. 

SBI Life, LIC, and Star Health may face limited impact 

Emkay expects SBI Life Insurance, Life Insurance Corporation of India, and Star Health to face relatively limited disruption, given their existing cost structures and distribution models. 

SBI Life, with an EOM ratio of around 11%, and LIC, with around 12%, are already broadly compliant with the proposed expense limits, according to the brokerage. Both companies would, however, need to reduce their EOM ratios to 10% over the next five years under the applicable proposals. 

SBI Life's relatively low-cost bancassurance distribution network and unit-linked insurance plan (ULIP)-focused business could help cushion the impact of lower commission limits. LIC's agency-driven distribution model could also offer some protection, as the proposed commission reductions for individual agents are relatively modest. 

However, HDFC Life, Max Financial Services and ICICI Prudential Life may need to renegotiate their distribution arrangements to comply with the proposed commission limits, particularly for retail insurance and credit life products. 

General insurers and standalone health insurers could face greater challenges in reducing their expenses to the proposed 20% limit. Star Health, however, is relatively better positioned because of its agency-led distribution model, Emkay said. 

PB Fintech, NBFCs face pressure as commission cuts threaten earnings 

The proposed changes could have significant implications for PB Fintech, the parent company of Policybazaar, and non-banking financial companies (NBFCs) that depend heavily on insurance distribution income. 

Emkay said PB Fintech's business model could come under pressure from sharp reductions in health insurance renewal and portability commissions, first-year term life commissions, and motor insurance commissions. 

NBFCs, including L&T Finance, Cholamandalam Investment and Finance, Mahindra & Mahindra Financial Services, and Bajaj Finance, could also see a material impact on earnings if the proposals are implemented in their current form. 

While the regulator's objective is to address misselling and improve insurance affordability, Emkay cautioned that steep commission cuts could make distribution financially unattractive, potentially undermining the industry's growth and the government's Insurance for All by 2047 ambition. 

The brokerage, however, expects the final regulations to be less stringent than the consultation paper. It said it would review its earnings estimates and ratings for insurers and NBFCs once there is greater clarity on the proposed changes.