Insurers being pushed into a commission ‘war’

IRDAI has brought into effect a new regulation on payment of commission to intermediaries and expenses of management for general and health insurers from April 1. This move is likely to trigger a bittercommission war among life and non-life insurersand specialised health insurers.However, state-run general insurers will be out of competition for the simple reason that they are already overburdened with a hefty wages bill and would not be able to offer commission to their agents beyond a certain limit.Freeing up of the commission cap, says Emkay study, raises the question – if this could trigger a ‘commission war’– especially by unlisted players, who have no pressure to show profitability but are focussedon garnering a market share and a foothold in the sector. The pressure of this ‘commission war’ will add to the misery of listed life and general insurers/share price that have been under pressure amid a difficult macroeconomic environment and adversely changing the regulatory environment. Moreover, the aggressive and opportunistic approach of unlisted players will adversely impact large listed players. One should remember that even when the regulator had such explicit commission caps in place, the business practice involved payouts beyond the limit, albeit under different heads.

This removal of explicit commission cap will bring in transparency and the payouts to distributors will be classified under ‘commission’. For listed larger players, despite commission limits being freed up, the struggle to deliver profitability to the shareholders while balancinginterests of policyholders and distributors would mean limited ability to materially tinker the payouts to their distributors. However, unlisted players, who do not have pressure to deliver shareholder’s return, will take an aggressive approach, especially in larger institutional distribution (banks, NBFCs and brokers) with their increased payouts. This ‘commission war’ will pose a challenge for listed players in their journey towards profitable growth.

Moreover, it is likely to mount pressure on low commission players such as SBI Life and IPRU. In contrast, commissionspaid by HDFC Life and Max Life have been on the higher side among listed players and, hence, they see relatively lower risk from aggressive unlisted players competing.

The fact also is that SBI Life and IPRU have enjoyed favorable commission rate and exclusivity in their key banca channel. Increased banca partnership limit and freeing up of commission would mean that there will be a long list of suitors for the banca partnership of SBI and ICICI Bank, among others, and that might add pressure to either increase commission payouts by SBI Life and IPRU or opening up of their key banca channels or both.

Freeing up of commission also adds some competitive pressure to STAR Health but the EoM cap should offset that pressure as smaller players will be struggling on the EoM front. Meanwhile, it will make valuation attractive for the listed players.

Listed life and general insurers have materially underperformed the broader market amid the recent adverse regulatory developments and are valued attractively.