Systematix Institutional Equities has called for the Insurance Regulatory and Development Authority of India (IRDAI) to re-evaluate its proposed changes to life insurance Expenses of Management (EoM) caps. The financial services firm emphasized that the new regulations, which aim to replace product-specific allowances with a single company-level cap based on total expenses divided by total premium, overlook critical drivers of operational costs within the sector.
Key Factors Overlooked by IRDAI
According to Systematix, two primary factors significantly influence EoM and appear to be disregarded in IRDAI's latest consultation paper:
- Product Mix: The mix of products offered, such as term insurance versus savings or ULIPs versus annuities, directly impacts expense structures.
- Premium Flow Mix: The proportion of single-premium policies compared to regular-premium flows also plays a crucial role in determining management expenses.
"We think these two factors are important and IRDAI may have to revisit the proposed caps," Systematix stated in its note.
Potential Impact on Insurers and Commission Structure
The proposed changes could lead to a substantial squeeze on private life insurers, with an estimated 500–750 basis point reduction in their expense ratios, enforced within a tighter commission framework. The consultation paper restores ceilings that encompass rewards, reimbursements, and related-party payments, which were previously removed after 2023 when only an overall EoM envelope existed.
Systematix detailed the revised commission structures for various products and distribution channels:
- Individual Savings (Par/Non-Par/ULIP):
- Independent Distribution Entities (IDEs) like banks, brokers, and aggregators could receive 5–20 percent first-year commission based on premium-paying term, and 2–3 percent for renewals.
- Tied agents could receive 6.25–25 percent first-year commission and 5 percent for renewals, increasing by 0.5 percentage points every three years from year six, capped at 7 percent.
- Regular-Pay Term Insurance: This category offers richer commissions, with IDEs receiving 25 percent/7.5 percent (first-year/renewal) and agents 30 percent/10 percent.
- Single-Premium Products: Single-premium savings are capped at 1–2 percent, while single-premium term products are capped at 7.5–10 percent.
- Other Business: Group term, annuities, and fund-based businesses are subject to low single-digit caps.
- Credit Life: Commissions for credit life sold by lenders are significantly reduced to 2 percent for single-pay and 2.5 percent/1 percent for regular-pay, down from observed payouts of around 45 percent.
The firm also noted that open architecture models receive less compensation than tied agencies, and rural first-year business can add 10–20 percent to the applicable cap.
Despite these concerns, Systematix has maintained its ‘Buy’ rating on six key life insurance stocks: SBI Life Insurance Company Ltd, Max Financial Services Ltd, HDFC Life Insurance Company Ltd, Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company Ltd, and Canara HSBC Life Insurance Company Ltd.