Insurance reforms: Need for a balanced approach

Why in the News

Insurers’ expenses of management (EoM) limits would fall sharply, for general insurers from 30% of premium to 20% within five years, under a proposal by the Insurance Regulatory and Development Authority of India (IRDAI). Its consultation paper, “Recalibrating Economics of Insurance Distribution”, faces the strongest industry resistance of any regulatory change so far, and brokers say “the evidence does not support the remedy”.

What is the expense of management limit, and why lower it?

1. What EoM is: EoM is what an insurer spends to sell and run policies, meaning commission plus operating costs. The regulator caps it as a share of premium, like a spending limit on overheads.
2. Stated aim: IRDAI promises a “customer-centric, competitive, efficient and transparent distribution ecosystem” for policyholders, insurers and distributors.
3. Current framework: The present expense and commission rules date from 2023, and the Insurance Brokers Association of India (IBAI) wants them kept until their scheduled 2028 review.
4. The takeaway: IRDAI wants selling insurance to cost less, but costs differ by sales channel, so one uniform limit falls unevenly.

What does IRDAI propose?

1. Life insurers: The EoM limit would apply at company level on Gross Direct Premium Income (GDPI), the premium written directly on policies, and fall to 12.5% within five years.
2. General insurers’ base: The limit would be measured on domestic GDPI instead of Gross Written Premium (GWP), with the limit cut in yearly steps, a glide path.
3. Three categories: Fragmented intermediary types would give way to Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs), under “same structure, same functions, same norms”.
4. Wider changes: IRDAI also seeks to end regulatory arbitrage, where similar intermediaries exploit different rules. It would lift curbs on intermediaries’ non insurance business, ease entry and capital norms, and revise commission rules.

Why do brokers say the evidence does not support the remedy?

1. Falling costs: General insurance EoM has already fallen as a share of premium, even as premium grew about 13% a year, IBAI argues.
2. Reclassified commission: The reported rise in commission largely reflects payments earlier booked under other heads, which the paper itself acknowledges.
3. Forced sales: The paper’s own figures place high cost where the buyer has no choice. Eg. Dealer controlled motor insurance pays up to 75%.
4. Independent channels: Independent brokers and agents average 17 to 18%. The proposal still caps every channel, with the lowest cap on the customer’s own broker.

What do insurers and intermediaries want before limits are notified?

1. Insurers’ objections: Every stakeholder except policyholders has objected, and insurers remain in dialogue with the regulator.
2. Letter to the Prime Minister: IBAI has warned that the reforms would cost jobs and growth and reduce competition.
3. Impact assessment: IBAI wants a published impact assessment on policyholders, employment, public sector insurers and foreign investment before any limit is notified.

Challenges

1. Cost shifting: A tighter limit pushes insurers to book payouts under heads outside the measured expense instead of removing them.
2. Low penetration: Thinner margins make small rural policies harder to sell, with penetration at 3.7% against a 7% global average.
3. Captive channels: Bank and dealer counters sell to buyers with little choice, so mis-selling persists whatever the cap.
4. Existing breaches: Insurers already overshoot current limits. Eg. IRDAI barred two insurers from opening new offices in 2024-25.

Way Forward

1. Channel wise disclosure: IRDAI should publish each insurer’s commission and EoM data by channel, exposing high cost captive channels.
2. Targeted caps: Set tighter limits on forced sale channels such as credit life and dealer motor than on independent advice.
3. Suitability record: Require sellers to record why each product suits the buyer.

Conclusion

A uniform cap falls on independent and captive sellers alike. The proposal is still at consultation, with no date for final regulations, so the test is whether IRDAI aims its limits at captive channels.

Key numbers

1. General insurance EoM: 28.2% of premium (FY23) to 26.5% (FY25), as cited by IBAI.
2. Loan linked credit life commission: 42 to 45%, from the consultation paper’s figures.

Back2Basics: Insurance Regulatory and Development Authority of India

1. Governing Act: A statutory body under the Insurance Regulatory and Development Authority Act, 1999, created on the Malhotra Committee’s recommendation.
2. Appeals: Its orders are appealable to the Securities Appellate Tribunal (SAT).
3. Earlier coverage: “Irdai proposes specific caps on insurance commission” (24 September 2026) examined the segment wise commission caps in the same paper.

Matching Previous Year Question

“[2015, GS2, 12 marks] For achieving the desired objectives, it is necessary to ensure that the regulatory institutions remain independent and autonomous. Discuss in the light of the experiences in recent past.”