When the insurance regulator’s proposals for limits on expenses of management (EoM) for life insurers turns into rules, insurers will get the much needed wiggle room to manage their costs. That said, it is unlikely that this would lead to a surge in commissions when intermediaries renegotiate their contracts.
EoM for life insurers includes the costs incurred to sell policies such as commissions to agents and other intermediaries, and other operating expenses like reinsurance.
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Last week, the Insurance Regulatory and Development Authority (IRDA) sought to consider an overall limit on the EoM for life insurers. This is a significant change from the current regime where limits are prescribed product-wise and premium tenure-wise. Notably, commissions would be subsumed in the overall EoM and the separate cap on commissions would be removed.
Agent commissions comprise the biggest chunk of the expenses of life insurers, especially for the life insurance behemoth Life Insurance Corporation (LIC) of India. Among other life insurers, HDFC Life Insurance, Max Life Insurance, and ICICI Prudential Life Insurance also have an elevated commission rate. SBI Life Insurance has the lowest commission costs.
Analysts at Kotak Institutional Equities believe that commissions won’t increase as contracts with intermediaries are “hard negotiations.” Further, corporate agents not only sell policies but also provide other services such as education, awareness, and last-mile reach to insurers. Note that life insurance is largely a push product as it is not a straight financial investment for policyholders.
“In select cases, mostly of tie-ups between insurance subsidiaries and parent banks, low commission levels may inch up but we don’t expect major changes due to the parentage of the distributor,” a Kotak note dated November 23 said.
Analysts at investment firm CLSA point out that for some distributors (such as SBI), an increase in commission rates does not add up to significant earnings on their balance sheet. Life insurers that have their parent firms as corporate sales agents have an advantage as commission rates are subdued.
Other forms of partnerships, such as between Axis Bank and Max Life, have resulted in the former getting higher commission rates to hawk life insurance policies. “With no commission cap now, the key will be to see if the parent bank would like to get a higher pay-out from their insurance subsidiary,” CLSA analysts wrote in a note.
The rule change, effective next year, would ensure that distributors get their dues from life insurers. New tie-ups, especially those with digital intermediaries, could be done at higher levels of commission. This explains the bullish sentiment towards PB Fintech, a key fintech player involved in insurance sales. With commission caps off, PB Fintech (PolicyBazaar) has a structural edge on growth.
IRDA has also eased the norms for insurance tie-ups. Distributors can now hawk policies of up to nine insurers, far higher than the prescribed three currently. There is potential to extract higher commission rates in new tie-ups.
Morgan Stanley expects intermediaries such as PB Fintech to benefit. Even as partners earn more, the overall cost is unlikely to surge for insurers. Kotak analysts point out that there would be more clarity on the different services that distributors offer, besides selling policies.
For LIC, though, the EoM would be tough to manage. The insurer has one of the highest commission rates and relies mostly on its own agents for growth. In fact, the regulator had provided forbearance in the past when LIC couldn’t keep its EoM within limits.
IRDA’s proposal now includes the option of forbearance as well. The regulator is open to giving leeway to insurers that may not be able to meet the new norms in FY23.
In all, with the new EoM rules, and the bunch of relaxations on capital and distribution tie-ups that IRDA announced at its latest board meet, life insurers can look forward to sustained growth in the coming years.
That should explain the surge in the shares of listed life insurers and the optimism of analysts about these stocks.
