The draft regulations aim to reduce and merge the large number of expense and commission limits based on product segment and company’s age to much simpler and lesser number of overall limits, Emkay Global said.
Overall expenses of management limits for general and health insurers fall to 30% of gross written premium from about 31-33% (blended) currently.
The regulator aims to reward better persistency for life insurance. Increased the commission cap on renewal to 10% from the existing 7.5%, added some rewards for renewal beyond five years, it said in a note.
The 20% commission and rewards cap on the individual life insurance regular new business might seem like meaningful reduction from the current 15-35% commission and 3-7% additional rewards for agents, the note said. All listed private life insurers, in practice, have been paying less than 20% commission in life regular premium, on overall portfolio basis.
“But the first-year commission cap could compel Life Insurance Corp of India to make some adjustments,” the note said, as LIC offers around 27% commission in the first year. As its product mix largely consists of non-ULIP traditional saving products it entails first-year commission to around 30-35% along with rewards of about 6-7% to eligible agents. This could pose a challenge.
The brokerage also expressed concerns surrounding the limits of motor third party insurance. It said that the current commission and rewards put together entail around 18-19% for general insurers, except the motor TP line, wherein commission rates are nil in the first three years and thereafter 2.5%.
“The draft regulation does not mention anything on Motor TP, causing some confusion as a 20% commission cap on Motor TP would mean a material increase in overall commission outgo that does not essentially follow the direction of slightly lower EoM limits,” Emkay Global said.
“This [draft regulations] is a step in the right direction as it carries the potential to enhance persistency, cost metrics, and penetration of life Insurance in the country,” the brokerage said in a note.
The regulation will usher in greater discipline in the sale of insurance products as it seeks to adequately incentivise agents and insurance intermediaries as commission rates will be linked to persistency rate versus the policy tenure-based payout that prevails currently.
It also benefits players with a lean cost structure.
“On the basis of our interactions, actual EoM for some of the top life insurers are below 70% of allowable EoM limits,” the brokerage said. “This introduces flexibility to design a customized commission structure, which can drive a product mix of choice.”
For the others with a higher ratio, it will create an aspiration to attain a ratio below 70%, the note said.
Overall, the brokerage expects the new structure to improve penetration and drive higher growth.
SBI Life has the lowest first-year commission rate at 8%, while other private peers operate in the 17-18% range. LIC has a higher rate at 26%. Since most of the smaller players operate at a higher rate, they will be adversely affected if the draft guidelines come into being in its current form, the note said.