Insurers trying to expand into Tier 3 and Tier 4 cities will still need agent networks there, and those networks cost more to run because of lower business volumes. Sharp cuts to commissions, he said, could make that expansion harder to justify.
The Insurance Regulatory and Development Authority of India’s latest consultation paper proposes a broad overhaul of insurance distribution, with lower expense of management limits, tighter commission caps and greater transparency for policyholders.
Sharma also flagged an open question in IRDAI’s concept paper: whether any savings from lower commissions will actually reach policyholders. He said the paper is silent on this point, and that IRDAI will need to ensure the savings are passed through rather than absorbed by insurers or distributors.
“IRDA actually needs to very carefully calibrate their policy so that both the functions can be effectively taken care of,” Sharma said, referring to the regulator’s twin goals of oversight and market development.
Sharma said high commissions are not necessarily good for the industry either. When the commissions are high, one spends more to collect, to get business also, he said, adding that rationalising commissions is a good step in cases like motor insurance, where the product is legally mandatory and does not need heavy sales effort.
He pointed to the separation of insurance sales from car purchases — previously often bundled together — as another example of a change he supports.
Not every insurance line works the same way, he cautioned. Business insurance is less exposed to commission cuts because competition among insurers is already high. Personal lines, sold directly to individuals, face more pressure. He singled out liability insurance as a category where low commissions would not work, given the high effort needed to sell policies with low premium volumes.”In liability insurance, the premium volume is so low that low commissions will not work, because the effort is too high — it’s not commensurate with the commissions you get,” he said.
On the specific limits proposed under IRDAI’s Expenses of Management (EoM) rules — which cap how much insurers can spend on distribution and operations — Sharma said the regulator appears intent on plugging indirect payouts to agents, such as foreign trips and gifts, in addition to direct commissions.
Asked whether he had estimated the financial hit to the industry from the proposed cuts, Sharma said the changes would encourage unhealthy competition among insurers and distributors, though he did not offer a specific figure.
For the full interview, watch the accompanying video
Catch all the latest updates from the stock market here