The Insurance Regulatory and Development Authority of India (IRDAI) has proposed sweeping changes to insurance distribution regulations, including the reintroduction of hard commission caps, tighter expense management norms and a simplified distributor framework. According to reports from NDTV Profit, these proposed reforms could have significant ramifications across insurers, distributors, banks and brokers. The changes aim to reduce distribution costs and improve overall efficiency in the insurance sector. The IRDAI put out a consultation paper on Wednesday, September 23, which put the spotlight on the economics of insurance distribution, proposing a broad recalibration including rationalising expenses of management (EoM), tighter control on commissions and more transparency for policyholders. As per Centrum's latest analysis, the proposed regulations could lead to lower commission payouts and tighter expense controls across the life insurance industry.
IRDAI Chairman Ajay Seth has indicated that even insurers like Life Insurance Corp (LIC) and SBI Life, which already operate below the proposed expense of management (EOM) limits, should seek further cost efficiencies. Both insurers broadly operate within the thresholds proposed by the regulator, with LIC's EOM at around 12% and SBI Life's EOM at around 11%. According to The Economic Times, Seth stated that if an insurer can operate at 12% EOM, there is scope for further improvement to bring it below 10%. The regulator believes controlling EOM should improve efficiency and increase value for policyholders. As per Emkay's analysis, given SBI Life's relatively low-cost bancassurance model and LIC's agency-led distribution structure, this will be manageable for both of them. Seth emphasized that "those who are at 20%, 22%, 25%, need to come to a more reasonable level".
Under the proposed IRDAI regulations, company-level Expense of Management (EoM) caps for life insurers would be tightened to 12.5% of Gross Direct Premium Income (GDPI) within five years, starting from the current level of around 16%, according to The Economic Times. The cap would then be reduced further to 12.5% within five years, replacing the current aggregate ceiling. For general insurers, the limits would be 25% within two years and 20% within five years, compared with the current 30% limit. The top-performing low-cost insurers could eventually bring their expense levels down to around 10%. To enforce the new expense boundaries, commission payouts would be capped depending on the product structure, policy duration and distribution channel. The proposed commission rates range from 25% for individual agents selling long-term policies of 10 years or more to 2-10% for single-premium policies. The framework would also bring indirect payouts within statutory commission limits, with marketing allowances, infrastructure support and travel incentives included under the commission caps.
The proposed framework could sharply reduce payouts on products sold through lenders, with commission on credit-life insurance capped at 2%, compared with about 28% currently and, in some cases, up to 45%. According to Macquarie's analysis, among banks, Axis Bank and HDFC Bank are more exposed than ICICI Bank and Kotak Mahindra Bank to the proposed changes due to larger contribution of insurance fee income to their revenue and profit before tax. Axis Bank's bancassurance fee income rose to 2.4% of revenue in FY26 from 2.1% in FY25, while its contribution to profit before tax increased to 12.5% from 9.2%. HDFC Bank's insurance fee income accounted for 1.9% of revenue and 7.3% of PBT in FY26, compared with 1.8% and 7.1% respectively a year ago. By comparison, insurance fee income contributed 0.2% of revenue and 0.6% of PBT at ICICI Bank in FY26, while the corresponding figures for Kotak Mahindra Bank were 1.6% and 5.8%, and at SBI, the contribution stood at 0.5% of revenue and 2.6% of PBT.
The insurance distribution industry could see a shift in business models as proposed regulatory changes by the Insurance Regulatory and Development Authority of India (IRDAI) prompt distributors to explore new products, services and revenue streams, according to Nomura's latest report. The proposed framework would allow distributors greater flexibility to undertake insurance as well as other financial and non-financial activities, potentially creating additional business and income opportunities. PB Fintech, which has a 'Neutral' rating from Nomura, indicated during its September 24 analyst call that it would need to rethink its business model given the proposed distribution changes. The company said it would evolve from a 'growth at any cost' mindset to a 'rationalised growth' mindset, given the changes to the distribution structure proposed by the regulator. While PB Fintech has indicated 'no mass layoffs or radical reactions', the company plans to trim marketing expenses and slow down hiring. The efficiency drive could also alter competitive dynamics in the industry, with smaller insurers able to gain market share if they operate more efficiently, as noted by Seth. The regulator emphasized that "it is also not only about large companies. Smaller players can improve and overtake more established ones."
