Sathe said the current insurance products have been designed around the existing distribution structure.
If distribution costs and commissions change under the proposed framework, insurers would consequently need to revisit their products and pricing.
“Right now, what plans they have are based on the present distribution structure. So this is something which will have to be done. All their existing plans probably will have to be modified and realigned with the guidelines which are issued,” Sathe said in an interview with CNBC-TV18.
He said insurers may need to withdraw and relaunch products at lower costs, describing this as a significant challenge given the number of products offered by insurers, because every insurance company has got at least 20, 30, 40 products.
Sathe stressed that the IRDAI document is a discussion paper and that stakeholders can submit their views to the regulator.
He said insurers would have time to realign their strategies before the final regulations come into effect.
From a policyholder perspective, Sathe said he welcomed the proposed changes, arguing that lower manufacturing and distribution costs could help reduce mis-selling and make insurance more affordable.“I will welcome these changes honestly, because misselling will get reduced, the cost of manufacturing and distribution will get reduced, as a result of which it will help the policyholders for buying more insurance,” he said.
Sathe said cheaper and more attractive products could improve affordability and potentially increase insurance penetration, particularly if term insurance premiums fall further. He cautioned, however, that any increase in business would take time.
“It has to be, but not immediately. It will take some time,” he said when asked whether lower commissions and prices could generate enough additional volumes to offset the impact on the industry.
On distribution channels, Sathe said individual agents would not be substantially affected because their commissions are linked to the effort involved in selling insurance. He expects bancassurance and brokers to face greater pressure on fee-based income in the short term.
He also said digital distribution could gain importance, with Bima Sugam expected to provide customers another avenue to compare and buy insurance products.