The Insurance Development and Regulatory Authority have moved cap commissions in the insurance sector to provide operational flexibility to the companies and promote discipline in the life insurance sector.

This week, the regulator came out with an exposure draft in which it is proposed to cap commissions paid by the health and general insurers at 20 per cent of gross written premium (GWP). The proposed commission cap is 20 per cent on the first-year premium, which is compared to 5-7.5 per cent, and the renewal premium (RP) is 10 per cent compared to 35-40 per cent.

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“Irdai wants to encourage greater persistency and longer tenure products and ensure that commissions are spread out instead of being paid upfront,” said Suresh Ganapathy and Param Subramanian, media reported.

“The draft benefits players operating with a lean cost structure as it allows companies with EoM at sub-70 per cent of allowable limits to design a customised commission structure according to the board-approved policy. This can drive a product mix of choice and boost margin and value of a new business,” said Motilal Oswal in a report on Thursday.

Rushabh Gandhi, Deputy CEO of IndiaFirst Life Insurance, said, “Linking commissions to EoM will drive insurers to improve efficiencies further. Back-ending of commissions will encourage distributors (agents and intermediaries) to ensure policies remain in force for a longer period resulting in a win-win for all stakeholders, including policyholders.”

According to Emkay Research, “the EoM and commission payment changes are far from being a negative surprise for existing listed private players, but the FYP commission cap could compel Life Insurance Corporation to make some adjustments”.

The purpose of the regulation is to enhance the responsiveness of regulations to market innovation and to provide insurers with the flexibility to manage expenses based on their growth aspirations to improve market penetration, also said.