The 160-page document is a consultation paper, and stakeholders have until October 25 to submit their feedback.
The proposals have brought the Expenses of Management (EoM) framework and the cost of insurance distribution back into focus. Speaking to CNBC-TV18, Thomas Devasia, former Member of Non-Life at IRDAI, and Swami Saran Sharma, Founder and CEO of Helios Global Solutions, discussed the possible implications for insurers, distributors and policyholders.
Why is IRDAI looking at commission caps again?
A key proposal is the return of product- or line-of-business-specific commission caps.
Devasia said he considered this approach regressive because the EoM framework was itself a more progressive way of regulating expenses. In his view, the issue was more about implementation and enforcement than the framework itself.
He said payouts that had existed outside the visible commission structure started being accounted for as commissions after the EoM framework was introduced.
“The payouts remained. The issue is, I believe that EoM tweaking was all that was necessary to enable commissions to get self-regulated,” Devasia said.
He also questioned the need for hard caps at a time when the insurance industry is moving towards risk-based capital and risk-based supervision.
Devasia cited Brazil, where risk-based capital rules determine how insurers can allocate resources, rather than relying on hard EoM caps. He said this was an area where the proposed approach could be seen as regressive.
Sharma broadly agreed with Devasia’s assessment of the EoM framework.
He said the latest proposals are close to the commission caps introduced through the 2016 amendments, which, according to him, did not deliver the desired outcome over the following years.
“That is why IRDAI had to bring the other side, capping, which is EoM,” Sharma said. He added that EoM should have held its ground if the regulator had enforced it effectively.
Will lower commissions mean cheaper insurance?
For policyholders, one of the key questions is whether lower commissions will eventually translate into lower premiums.
Devasia said retail insurance prices have not visibly changed in line with the underlying commission paid to distributors.
“In no situation under any line of business or product has the price of the product been visibly modulated by the underlying commission outgo,” he said.
In other words, restricting commissions does not automatically mean that retail customers will see an equivalent reduction in premiums.
Devasia contrasted this with the recent reduction in GST on health insurance, which provided direct relief to customers. However, he said medical and hospitalisation costs could push premiums higher again over time.
His concern is therefore whether commission controls will have a meaningful impact on the price paid by retail insurance customers.
Could lower distribution costs increase insurance penetration?
Another question is whether cheaper insurance distribution could lead to higher insurance penetration, particularly in segments such as health and term insurance.
Sharma said insurance cannot be expected to respond in exactly the same way as mutual funds.
Mutual funds are investment products, where even a small improvement in returns can make them more attractive compared with products such as fixed deposits. Insurance, on the other hand, primarily provides risk cover.
Sharma said a reduction in premiums could nevertheless encourage people who are inadequately insured to increase their coverage.
“So it will not increase the business in the same proportion, but yes, if somebody is not adequately covering himself or herself, it will have an incentive,” he said.
What could happen to insurance distributors?
The proposed commission cuts could also affect the economics of insurance distribution.
Sharma said distributors retain only a small portion of their commission income as net earnings after accounting for their costs. He said that against commission earnings of more than 30% on average, distributors may retain no more than 5% as net commissions.
Based on this assessment, Sharma said the approximately 10% cut in commission levels proposed in the consultation paper could put significant pressure on distributors.
“I think it is going to have a negative effect on the growth of business,” he said.
Sharma added that distributors could respond by reducing the size of their operations.
What are dark patterns and why are they part of the proposal?
The consultation paper also seeks to address dark patterns in insurance distribution.
The proposal would prevent practices that require consumers to provide personal information before they can access details such as product features and pricing.
For consumers, this could mean being able to view basic information about an insurance product before sharing their personal details.
For aggregators and other distributors, however, the proposal could affect the way leads are generated and converted into business.
Devasia described the dark-pattern provisions as one of the more unusual elements of the consultation paper, given the traditional focus on commissions and expenses.
What are MIIs and how could they affect digital insurance sales?
The consultation paper also proposes allowing insurance companies to come together and form Mutual Insurance Intermediaries, or MIIs, similar to Bima Sugam.
Under the proposal discussed in the interview, commissions through an MII cannot exceed 5%.
Devasia said more information would be needed to assess how the model will work in practice. He said the consultation paper requires at least 11 insurers to participate in an MII, indicating that scale and capital would be important for such platforms.
The bigger question, according to Devasia, is whether the benefits would reach consumers directly through lower costs or whether MIIs would mainly improve operational efficiency and information exchange.
Devasia also pointed to the Public Insurance Registry (PIR), which he said is the infrastructure that would drive an MII.
What happens next?
The proposals are not final. IRDAI has released the document for consultation and stakeholders have until October 25 to submit their feedback.
The final framework will determine how the proposed commission caps, EoM rules, restrictions on dark patterns and MII structure are implemented across the insurance distribution ecosystem.