Insurance Stocks Fall 10-20% as IRDAI Proposes Caps on Life Policy Commissions

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a new ceiling for commissions on individual life insurance policies, aiming to curb upfront sales incentives and encourage policyholders to persist with multiyear payment plans. Insurance and insurance-linked stocks fell between 10 per cent to 20 per cent on Thursday in reaction to the draft paper on these distribution reforms.

"Commission structure for life insurance policies should incentivise distribution persons and entities to nudge policyholders to persist with the multi-year payment plans instead of incentivising first year payment," the regulator said in a consultation paper. IRDAI proposed maximum commission limits for individual non-linked and linked life insurance policies based on the premium payment term (PPT). For PPTs of less than five years, the proposed cap is 5 per cent for distribution entities and 6.25 per cent for agents. In policies with five-year PPT, the caps rise to 10 per cent and 12.5 per cent, respectively.

For PPTs of six to eight years the limits would be 14 per cent and 17.5 per cent, respectively. These rise to 18 per cent and 22.5 per cent for nine-year payment terms, and 20 per cent and 25 per cent for PPTs of 10 years or more. The regulator also proposed lower commissions for single premium products and products with tax incentives. For example, first year commission for individual savings policies with a single premium would be capped at 1 per cent for distribution entities and 2 per cent for agents, while single premium pure term policies would see 7.5 per cent and 10 per cent caps.

Commissions should be comprehensive, covering incentives, awards, selling expense reimbursements and non-cash benefits, the paper said. The first-year commission could be up to 7.5 per cent for distribution entities and 10 percent for agents in single-premium term policy, while a multi-year premium term policy could allow first-year commission up to 25 per cent for distribution entities and 30 per cent for agents.

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