Insurance distribution reforms may weigh on near-term growth: ICRA

The proposed overhaul of insurance distribution economics could lead to near-term pressure on insurance industry growth and distributor profitability, with the impact likely to become more visible in FY28, according to ICRA. Health and life insurance could see a relatively higher impact because of their greater dependence on distributors, while smaller insurers may face greater pressure because of weaker scale and higher fixed costs.

Life and general insurance companies have recorded a healthy compound annual growth rate (CAGR) of around 12 per cent over the past five years. ICRA expects FY27 growth to remain largely unaffected, with the impact of the proposed reforms becoming more visible in FY28 as distributors realign their business models.

“The proposed reforms could lead to near-term pressure on distributor profitability and industry growth,” ICRA said, adding that growth could be affected by lower business volumes during the distributor realignment phase and lower premium rates resulting from reduced distribution costs.

The Insurance Regulatory and Development Authority of India’s (Irdai’s) consultation paper proposes a phased reduction in expenses of management (EoM) ceilings and tighter product- and channel-specific commission caps.

For general insurers, the EoM ceiling is proposed to decline from 30 per cent currently to 25 per cent within two years and 20 per cent within five years. For life insurers, it is proposed to fall to 15 per cent within two years and 12.5 per cent within five years.

Most private insurers currently operate above the proposed thresholds, ICRA said. While lower commission payouts would help insurers comply, smaller players could face greater pressure because of their higher fixed-cost base and weaker scale efficiencies.

Health and motor insurance could see a significant impact from the proposed caps. Individual health first-sale commissions currently average 24 per cent, compared with a proposed cap of 15-20 per cent, while renewal commissions average 14 per cent, against a proposed 5-10 per cent.

Motor own-damage new-business commissions average 26 per cent, compared with a proposed 5-10 per cent cap. For motor third-party insurance, the proposed cap on new business is nil to 2.5 per cent, against an average payout of 14 per cent currently.

ICRA said health remains the largest contributor to general insurance growth, and any moderation could materially affect overall industry performance. Lower distribution costs, however, could eventually improve pricing and support growth.

Credit-linked insurance is another area facing sharp commission cuts. Proposed caps stand at 2.5 per cent for regular-premium products, 1 per cent for renewals and 2 per cent for single-premium products.

“Lower lender remuneration may lead to a decline in credit life volumes,” ICRA said. The proposed prohibition on linking credit approval to insurance purchases could further moderate sales.

This could affect banks’ and non-banking financial companies’ (NBFCs’) insurance fee income. ICRA expects NBFCs and housing finance companies to see a relatively higher impact on profit after tax than banks, as insurance attachment rates on loans have increased.

The reforms could also alter competitive dynamics, with distributors potentially favouring larger insurers with stronger brands and greater distribution pull.

ICRA said smaller insurers, particularly those dependent on brokers or bancassurance, could face greater pressure because of weaker scale, lower brand value and higher fixed expenses.

Distributors, meanwhile, may need to cut costs, improve productivity, increase volumes and expand cross-selling to offset lower commissions. ICRA expects the changes to accelerate industry consolidation over the longer term.

“The proposed reforms are expected to be structurally positive for the industry, improving cost efficiency, pricing transparency and policyholder value, albeit with some near-term pressure on growth,” it said.

Lower distribution costs could eventually translate into better pricing and higher insurance penetration, supporting the government’s “Insurance for All by 2047” objective.