Why the latest proposals have shaken insurance stocks and why the banks are now part of the story
For years, the Indian insurance narrative for years has been very simple – increase penetration, grow premiums, establish distribution, and watch the economics of a rapidly expanding market take care of the business.
IRDAI’s new consultation paper calls it into question.
On 23 September 2026, the Insurance Regulatory and Development Authority of India (IRDAI) published its proposed framework titled “Recalibrating Economics of Insurance Distribution,” which focused on one of the most critical yet not the most obvious aspects of the insurance business: the cost of acquiring and distributing a policy.
The reaction of the market was harsh. Insurers and insurance distributors sold off heavily, with a couple of banks and NBFCs also taking a beating. The question of why insurance stocks dropped, however, is not the most interesting.
The real question is: Where is the money currently going through the insurance ecosystem, if the regulator alters the economics of distribution?
This is why this reform is so much more significant than a simple alteration of the rules of the commission.
What is IRDAI proposing?
The consultation paper is an attack on distribution economics from a number of directions. Expense of Management (EoM) is the first one. IRDAI has suggested reducing the company-level EoM limit to 15% of the Gross Direct Premium Income (GDPI) over a period of two years and 12.5% in five years for life insurers. The proposed limit will be raised to 25% in two years and 20% in five years for general insurers, and will be recalculated using the domestic GDPI.
That is, the regulator is suggesting a multi-year glide path instead of a reset.
The second (and likely more impactful) adjustment is the commission limits by product, segment and channel. The proposed framework takes into account the nature of insurance, the nature and duration of the contracts, the distribution channel, complexity of the insurance product and the effort required in selling and serving the insurance product.
The third is the treatment of insurance distribution via banks and NBFCs. IRDAI has suggested limiting the volume-linked or reward-linked incentives of bankers and NBFCs’ employees selling insurance. The consultation also aims to ensure that insurance does not become ‘bundled’ with lending, enabling borrowers to select their insurance company.
Last, the regulator wants more accountability for mis-selling, such as establishing the identity of the salesperson and commission clawbacks where mis-selling is identified. This is not a commission-cap activity, therefore.
It’s a reimagining of the insurance distribution model.
Why was there such a strong negative response in the market? The existing distribution economics have been assumed in the market value of several insurance businesses.
PB Fintech, the parent of Policybazaar, was the first. On 24th September, the stock dropped by over 36%, the largest drop in a single day, and erased over ₹31,000 crore in market capitalization.
Turtlemint clocked a sharp decline at its bottom end, while other life companies like Max Financial, HDFC Life and ICICI Prudential Life also saw a significant drop.
The reaction is intuitively understood. When it comes to insurance, commission is not an expense for an insurance distributor. Commission is revenue.
However, commission is an acquisition cost for an insurer. That’s an interesting asymmetry.
A lower commission can actually be bad for a distributor, as it has a direct impact on the revenue per policy. However, an insurer’s cost of acquiring the same premium can get better at the same lower commission rate, and eventually this lower cost can be positive for that insurer.
That is why it is a mistake to consider the whole insurance industry as an entirely uniform beneficiary or a loser.
The key difference between an insurer and a distributor:
Let us assume that the premium is ₹100 and it is simplified.
Assume that in the past, an insurance company had been sending the business to its distribution channel for ₹30 per unit. Assume that the insurance company used to send the business to its distribution channel at an historic price of ₹30 per unit.
There are two separate effects if the price of that regulation is eventually reduced to ₹20.
For the distributor: The revenue decreases from ₹30 to ₹20.
For the insurer: The acquisition cost is reduced by ₹10 per unit.
There is a problem with that, though. The distributor can respond by decreasing the number of policies if the economics are not attractive.
Thus, the final equation is: Lower commission x higher retention / mix / lower acquisition cost versus Higher commission and slower new business growth. This is the main issue that investors should keep an eye on.
The reform may lead to an improved insurance economy in the long run. However, it may be a painful process for companies that rely on high distribution payouts to make their competitive edge.
Why were banks included in the sell-off?
Perhaps the most interesting second-order effect.
Bancassurance is the distribution of insurance, a product that banks do not produce. It is a desirable source of income for a bank because only relatively small capital is needed on the bank’s balance sheet to support this income.
The proposed framework thus poses an important question: What impact does insurance distribution economics have on a bank’s non-interest income? The four banks recorded heavy daily losses of around 4.8%, 3.9%, 3.5% and 4.8% respectively during the intraday session on 24 September at IndusInd Bank, IDFC First Bank, Axis Bank and AU Small Finance Bank. The other banks were down as well, with HDFC Bank being the only one that was comparatively strong.
The sale of “banks,” therefore, was by no means just for “banks.” It was questioning the importance of insurance distribution income within the walls of individual banks.
Why credit-life insurance is particularly important
Loan-linked insurance is an even more important change in the proposed changes. Oftentimes, credit-life products are sold together with loans, especially by banks and NBFCs.
Economically, this may be appealing as customer acquisition is low; the lender already has the customer. However, this also poses the same kind of conflict IRDAI is looking to resolve.
Can the lender make a big commission on the deal? if a borrower takes a loan, should the lender be able to effectively steer that customer towards a particular insurance product?
IRDAI’s initiative will not require insurance to be compulsorily linked with loans and may significantly slash commissions on certain loan-linked products. For the lender, this can translate to: reduced insurance fee revenues and reduced insurance distribution incentive economics. The goal for customers is to give them more options. How much new business insurers receive from these sources will affect their impact.
Could this actually be positive for insurers? Paradoxically, yes. Maybe that’s the most radical aspect of the plan.
Insurers may not be more profitable if the distribution cost is lower.
If an insurance company sells premium worth of ₹1000 crore but spends ₹300 crore to acquire that business, what is the accounting treatment for the transaction? If an insurance company sells premium worth Rs.1000 crore and spends Rs.300 crore to acquire the business, how to account for it?
Premium growth does not need to turn bad significantly if the acquisition cost eventually comes down to ₹220 crore; the insurer has made several economies.
The risk is that those savings may mean that insurers have to sacrifice growth. So, investors should keep a close eye on three parameters simultaneously:
- New Business Premium growth
- Value of New Business/margins
- The cost of distribution per unit of premium
As long as premium growth continues at typical levels and distribution costs stay low, the economics should be good. The results may be quite different if distributors cease pushing the product due to lower distribution costs.
The Bigger Picture
IRDAI’s proposal was touted as a commission-cut initiative in the market. Much larger than that.It’s a discussion about the structure of India’s insurance industry.
For years, distribution incentives have been the key for the industry to expand its growth in a market where insurance penetration is still well behind developed markets. IRDA seems to be now trying to move away from the “sell more policies” to “sell the right policy and provide the service accordingly”.
There are winners and losers to that transition. Reduced commissions are a risk to distributors’ revenue models. The worry for banks and NBFCs is that this might be a relatively capital-light fee income that could be lost.
For insurers, there is the possibility of achieving better economics under lower acquisition costs, but only if acquisition growth does not come at a material cost.
The goal for consumers is more choice, transparency, and less pressure for inappropriate sales. But, and perhaps most importantly, there will be changes for investors.