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Insurance stocks had a rough Thursday. PB Fintech, Turtlemint, HDFC Life, SBI Life, ICICI Prudential and others fell sharply after insurance regulator IRDAI proposed major changes to how insurance is sold in India.
The biggest worry: the amount of money companies can spend and distributors can earn from selling you insurance could come down.
But before we get into that let’s first, how does insurance selling work.
Say you buy a health insurance policy for ₹20,000.
The entire ₹20,000 doesn’t simply stay with the insurance company. If you bought the policy through an agent, bank, broker or an online platform, the insurer may pay that seller a commission for bringing in the customer.
That commission is an important source of revenue for insurance distributors.
And this is exactly what IRDAI wants to change.
What is IRDAI proposing: IRDAI wants to put clearer limits on how much commission can be paid, depending on what insurance is being sold and how it is sold.
Insurance sold alongside loans could face much lower limits. And products sold through an “open” system, where a bank or broker can sell policies from multiple insurers, could also attract lower commissions.
Why did PB Fintech and Turtlemint get hit hardest: PB Fintech owns Policybazaar, while Turtlemint also makes money by helping insurers sell policies.
So unlike an insurance company, which earns money primarily by actually providing insurance, these businesses are heavily involved in distribution.
If commissions come down, the amount they earn from every policy they help sell could also come down.
There’s more, IRDAI is also targeting something called Expense of Management, or EoM.
It basically means how much an insurer can spend to run and sell its insurance business including things such as commissions and operating expenses.
- For life insurers, IRDAI wants the company-level limit to move to 15% of premium income within two years and 12.5% within five years.
- For general insurers, the proposed limit would gradually fall from 30% to 20% over five years.
So companies may have to become leaner and more careful about what they spend to acquire customers.
The regulator has also proposed restrictions on forcing customers to bundle insurance with loans, along with stronger rules against mis-selling. It also wants insurers and large distributors to clearly explain their commission structures.
And then there are “dark patterns.”
These are tricks on websites or apps designed to push you towards something you may not actually want like hiding important information or making you enter personal details before you can properly compare a product.
IRDAI wants these practices prohibited on insurance platforms and wants customers to get clearer information when comparing policies.
