Life insurance companies, at CMP, bake in low growth rates. Some weakness expected in volume growth as lower commissions in savings and credit protect may put near-term pressure on volumes.
FinTech BizNews Service
Mumbai, 04 October, 2026: The much-awaited consultation paper on distribution guidelines by the IRDA has proposed commission and EOM caps to make insurance products leaner and drive favourable outcomes for all stakeholders. The latest Kotak Institutional Equities report focuses on Insurance.
Manageable for insurers, tough patch for distributors
The much-awaited consultation paper on distribution guidelines by the IRDA has proposed commission and EOM caps to make insurance products leaner and drive favorable outcomes for all stakeholders. The impact may be skewed, with lenders (NBFCs engaged in offering credit protection) exposed to most commission cuts, institutional distributors such as PB Fintech taking higher cuts over retail/individual distributors. The overall impact for life companies may be manageable over time, with some weakness in initial quarters till they achieve VNB neutrality. ICICI Lombard and multi-line insurers benefit from lower motor commissions; health insurance volumes may get a boost. We continue to like the life companies (SBI Life and HDFC Life are top picks), ICICI Lombard (post the massive stock price correction) and Star Health. We will revisit our estimates and view on PB Fintech once we get more color on their strategy. LTF, among NBFCs, is the worst hit.
Caps are proposed—tough for NBFCs and large distributors
The much-awaited IRDA guidelines, unlike recent media speculations, have proposed commission caps across classes of products and distributors. Overall larger and institutional distributors may have to take a higher haircut. The most prominent are NBFCs who earn large commissions from the sale of credit protect products; Exhibit 16 shows that insurance commissions were 3% to 25% of PBT for select NBFCs in FY2026. Commissions on life insurance packaged with credit will be capped at 2-2.5%; the commission on credit-protect single premium products was 22-57%; first-year commission to NBFCs (across products) averaged 42-67%, as per IRDA. We expect NBFCs to move customers to individual protection (7.5% cap for single premium products) from credit protect to partially offset the same.
EoM guidelines
IRDA has parallelly provided new EoM caps and a glide path of reduction. These caps are at the company level and not on the line of business. We expect steady alignment and reduction, benefiting low-cost players.
Retain positive stance of life companies, SAHIs; ICICI Lombard benefits as well
Insurance companies, at CMP, bake in low growth rates. We expect some weakness in volume growth as lower commissions in savings and credit protect may put near-term pressure on volumes. Life insurance, despite the cut, will remain a high-commission product, with arguably tailwinds in some segments after these guidelines. There may not be any destruction of distribution franchise, as feared by the Street; we do expect some weakness in the initial phase of realignment. SBI Life, the lowest cost and commission-paying player is best placed. Although HDFC Life has large credit-protect business, it may gain counter share at the parent bank, in the absence of uncapped commissions.
ICICI Lombard, SAHIs are well placed
ICICI Lombard, post recent correction, trades at 20X earnings and 3.2X book FY2028E. The recent court verdict and the subsequent rise in claims ratio have driven the correction in the stock. While we keenly await third-party tariff hikes, lower commissions (NIL in TP for new vehicles) will help offset this partially.
SAHIs benefit from higher retail health volumes. There has been high growth post GST cuts in the term and health businesses. These businesses are highly price elastic; the health business may see another tailwind from lower commissions leading to further price correction. This may reduce the impact on retail distributors who may have to take some commission haircuts. We expect health business volumes to pick up and partially/fully offset the impact of lower commissions on retail distributors.
PB Fintech will have to ride through tough times
The IRDA has proposed lower commissions on distribution entities (corporate agents, banks, PB Fintech, etc.), i.e., largely multi-insurer shops, rather than agents (largely single-insurer distributors). The latter is compensated for the constraints on the bouquet of products available for sale. As such, the haircut for PB Fintech will be higher than for smaller distributors. For example, commissions on health insurance, PB’s key focus segment, are capped at 15% (new) and 5% (renewal); 20% and 10% for agents. Average health new business commission in retail health, according to IRDA, was 24%, with maximum at 70%. The IRDA acknowledged that insurance business is incentivized on volumes and not on quality, the regulator has not proposed any incentives benchmarked on quality parameters—PB can arguably negotiate for the same. We do believe that the business has moats but will need to ride through rough times.
Life companies—manageable impact
Lower commissions on credit protect, a large VNB driver for select players, and lower commissions to distribution entities, especially in non-par, pose risk of lower volumes for a few quarters in FY2028E, assuming these guidelines are implemented from April 2027. The reduction in commissions may be manageable for individual agents and hence we expect them to realign over time. We expect companies to push for individual protection policies from credit protect. Some of the benefits of savings in commissions can potentially be retained to maintain VNB.
GI companies to benefit; SAHIs well placed
ICICI Lombard and other motor-heavy general insurers are reeling under the pressure of higher TP claims. The IRDA has proposed to cut TP commissions on new vehicles to NIL for distribution entities (including OEM dealers) and 2.5% for agents; OD commissions are also down substantially. Motor TP is a regulatory product; OD also has a large customer pull and as such, impact on volumes may be low. The benefits of the same will help offset high claims inflation in the sector.
The health business has seen massive tailwinds post GST cut, reflecting price elastic. As such, the cut in commissions may be neutral/manageable for agents (20% cap in first year, 10% cap on renewal, 11-27% was average commission paid), assuming business momentum picks up further and may possibly accretive for SAHIs.
IRDAI consultation paper on distribution reforms
Why the reform is being proposed?
4 | Expense ratios have retraced the full decade. IRDAI's case is that a decade of expense discipline has been unwound within three years of the 2023 liberalization, and policyholders have funded it. Private life total expense ratio fell from 21.3% in FY2015 to 16.5% in FY2021 and is back to 20.2% in FY2026; private general went from 30.3% to 25.1% in FY2019 and then to 32.1%, above its pre-2016 level (refer Exhibit 1and 2). The regulator's view is that the flexibility granted flowed into distributor payouts rather than affordability, and that the board approval of commission policies has been a formality rather than a control. Changes in business mix, increase in retail health, may have likely partially contributed to the rise, in our view. |
4 | Payouts have outgrown the premium they are paid on. Across sampled life corporate agents, new business premium rose 1.3X from Rs630 bn to Rs800 bn over FY2023-25 while remuneration rose 2.3X from Rs96 bn to Rs216 bn, taking effective payout to 27% of first year premium. Broker-led general insurance premium rose 1.4X while commission rose 2.7X, lifting the average rate from 8.5% to 17.0%. Reported commission understates cost by a further 30-60% through rewards and incentives. |
4 | Evidence that payouts reflect access rather than effort. The IRDAI points to the dispersion in payouts for identical work as the clearest indication that commissions are competitive bids for shelf space. Life insurers paid an average 27% of first year premium to bank corporate agents against a maximum of 62%, 42% to NBFC corporate agents against 67%, 61% to other corporate agents against 92% and 43% to brokers against 92%, while individual agents received 27% against a maximum of 34% (refer Exhibit 3-5). Within bancassurance, single tie-up arrangements carried an average total payout of 13% of new business premium against 33% for multiple tie-up arrangements. Private life insurers routed an average 31% of the total commissions to related parties, reaching as high as 95% in some cases. Operating expenses, excluding commissions, ranged from 6.1% to 27.7% of the premium for life insurers and 6.8% to 28.8% of GDPI for general insurers in FY2026, which the regulator reads as evidence that cost discipline is achievable but not being exercised. |
4 | Outcomes have not improved alongside the spend. Life persistency at the 61st month was 48.4% against 71% for policies sourced online. Surrenders were 37% of Rs6.3tn of FY2025 life benefits, against maturity at 35% and death claims at 7%. General insurance grievances rose from 78,347 in FY2023 to 137,361 in FY2025 (refer to Exhibit 11). The cost of doing business is 22% for life and 29% for general, against 10-12% for the two largest life insurers and 18% for the largest general insurer. |
Changes proposed
4 | EoM limits reset lower, on a clean denominator. Against the present single ceiling of 30% of gross written premium for general insurers with no product-level commission caps, the proposal sets life insurers at 15% within two years and 12.5% within five, and general insurers at 25% and 20% of GDPI, with a tighter 10% five-year target for life insurers already below benchmark. FY2028 is Year 1, with annual reduction mandatory (refer to Exhibit 6). It is not clear if SAHI’s will have an additional 5% EoM limits, as is the current case. |
■ | Three computational changes tighten it further. The denominator moves from gross written premium to domestic GDPI. The 2023 carve-outs for technology, insurance awareness and rural and government scheme spend fold back into the single limit. Reinsurance commission cannot be netted off. Separately, only one-third of gross PMFBY premium qualifies as GDPI. |
4 | Enforcement changes the character of the framework. Cost audit becomes mandatory for every insurer and for distribution entities with insurance revenue above Rs1 bn; entities above Rs500 mn must publish revenue, expenses, related-party payments and PAT. Non-convergence invites restrictions on new product launches, dividend distribution and new business through the channel responsible. The regulatory fee falls from 0.05% to 0.04% of premium, capped at Rs200 mn. |
4 | Commissions of life insurers return to hard caps, scaled to premium payment term. For individual non-linked and linked products at 10 years and above PPT, the limit is 20% first year and 3% renewal for distribution entities against 25% and 5% for agents, stepping down to 18%, 14%, 10% and 5% as PPT shortens. Individual savings on single premium is capped at 1% and 2%, against a FY2025 average of 11% and maximum of 45%. Multi-year pure term is allowed 25% and 30%. Annuity single premium is limited to 0.5% and 0.75%, with nil commission on annuity purchased from NPS (refer Exhibit 7). This is materially lower than current average level; haircut is higher for IDEs and less for agents; highest in credit protect, lower in traditional savings and liberal in ULIPs (Exhibit 10). |
4 | Renewal moves the other way, commission rises 0.5% every three years from the sixth year to a 7% ceiling, and policy term cannot be below 10 years or the PPT, whichever is higher. Against FY2025 actuals of 51% for pure term and 37% for participating, the grid is a substantial cut for savings and term, while ULIP at 14% sits below the proposed 20% ceiling (refer to Exhibit 10). |
4 | General insurers see mandatory covers capped at nil. Motor third-party on new vehicles attracts nil commission for distribution entities and 2.5% for agents, against a FY2025 motor average of 26%. Own damage on new vehicles is 5% and 10%. Retail health is 15% and 20% first time, dropping to 5% and 10% on renewal and porting. Group health is capped at 2.5% subject to Rs10 mn, against a FY2025 average of 15% and maximum of 93%. Property and engineering on a PML basis steps down by sum insured slab to 7.5%, 6.25% and 5.0% (refer to Exhibit 11). |
4 | Commission becomes all-inclusive. The definition now captures incentives, awards, reimbursement of selling expenses, brand value payments to related parties of distributors and non-cash benefits. Volume-linked and reward-linked incentives for bank and NBFC staff selling insurance are prohibited. The insurer's risk and audit committee and the distributor's CEO and board must each certify compliance. Outsourcing to related parties of distributors is to be avoided. |
4 | Credit-linked insurance sees the sharpest change. Compulsory bundling of insurance with loans is prohibited; a lender wanting portfolio cover must take a group policy and bear the premium itself. Life insurance packaged with credit is capped at 2% single premium and 2.5% first year with 1% renewal for multi-year, against a FY2025 credit life single premium average of 22% and maximum of 57%. For general insurers, bundled motor third party is nil, own damage 5%, health 5% and 2.5% on renewal (refer Exhibits 11). The context is NBFC-channel premium for life insurers nearly tripling from Rs36bn to Rs103bn over FY2023-25 at a 42% effective payout, 93% of it single premium group credit life, with group credit life commission rising from 5% to 28%. |
■ | Acceptable packaging is codified rather than banned. Complimentary group term for depositors and borrowers, cards carrying embedded cover and rate-linked additional security remain permissible, subject to the borrower knowing the rate with and without the security, being free to choose the insurer, and paying premium separately and not out of loan proceeds. The Rs50 mn risk cover limit is removed for MSME lending (refer to Exhibit 15). |
4 | Architecture collapses from seventeen categories to three. Eight entity types and nine categories of distribution persons become insurance distribution entities, insurance distribution persons and market infrastructure institutions, on the principle of same structure, same functions, same norms. Entry capital falls to Rs1 mn for all distribution entities against Rs5 mn to Rs50 mn today, supported by a lien deposit of 0.1% of prior year commission income within a Rs1 mn to Rs100 mn band. Registration becomes permanent against the current three-year cycle (refer to Exhibit 14). |
■ | Scope restrictions go with it. All distribution entities may adopt open architecture with no limit on insurers, against the present nine-insurer cap for banks, and the Rs50 mn sum assured restriction is withdrawn. Distribution entities and persons may sell non-insurance products, explicitly to reduce commission dependence. Qualification rises to Class 12 and training to 100 hours per segment. Hospitals may register as distribution entities for health, non-dealer garages as associates for motor and insurers may distribute a group insurer's non-competing products through branch employees. |
4 | Motor distribution loses a layer and its incentive structure. Motor premium grew 34% over FY2023-25, while motor commission grew 259%, with third-party commission rising from 4.3% to 22.0% despite regulated pricing. OEM brokers and MISPs earned Rs70.5 bn on Rs290 bn of premium in FY2025, averaging 27% and 38% on new vehicles. MISPs must register as distribution entities or become point of sale persons or single-insurer associates. Dealers must display the MII purchase option with QR code, share the customer mobile number with the Public Insurance Registry for VAHAN validation, and may not deny cashless repair for policies bought elsewhere. OEM incentive plans rewarding insurance sales are prohibited. |
4 | Mis-selling acquires a financial consequence. Documented needs and suitability analysis becomes mandatory for sales by life insurers above a defined ticket size, and customer consent will not absolve responsibility for an unsuitable sale. Twelve illustrations are codified, including non-par sold in lieu of bank deposits and ULIPs to risk-averse or post-working-age customers. Mis-selling triggers commission claw-back, with each policy tagged to the selling person's functional identity and incidence placed in the public domain (refer to Exhibit 15). |
4 | Money flow is disintermediated. Premium must move directly from the customer's own account to the insurer, with third-party payments not permitted other than through Bima-ASBA, removing intermediary float. Reinsurance funds bypass broker accounts and claims are payable only to a verified policyholder account. In return, commission becomes payable to distributors within a day of free look expiry, with delay attracting interest charged to operating expenses. |
4 | Transparency shifts insurance toward being purchased rather than sold. Dark patterns are to be prohibited, with product features, pricing and claims performance accessible without the customer surrendering personal details. One-page information sheets are to be developed by the Councils. Commission policies must be published within one click of the landing page, and commission stated on policies with cover above Rs500 mn. Bima Sugam is expected operational within four to six months, with further MIIs encouraged on a not-for-profit basis and preferred distribution status at fee levels well below current commission rates. The Public Insurance Registry will enable Know Your Insurer and Know Your Distributor, portability and distributor identity. |
4 | Process and timeline. These are consultation proposals, not final regulations. They were released on September 23, 2026 in two parts, with 32 consultation questions; comments close October 25, 2026. |
