Finance companies have asked the insurance regulator for five years to bring down the commissions they earn on selling insurance, and for permission to pay premiums straight to insurers on behalf of their borrowers.
The Finance Industry Development Council (FIDC), the industry body for non-banking finance companies, made the request in a submission to the Insurance Regulatory and Development Authority of India (IRDAI) on October 24. It argues that the commission limits now under consideration would make it unviable for lenders to sell credit-linked insurance.
What the regulator has proposed
IRDAI’s draft would cap commissions at 2% of the premium for credit life insurance and 5% for credit health insurance. FIDC says these ceilings are far too low compared with what it costs lenders to distribute such cover.
According to the industry body, distribution costs work out to about 32% of the premium. It says its activity-based cost model includes the expense of acquiring customers, running branches and bearing the credit risk that comes with financing insurance premiums.
The council also says the proposal ignores the spending lenders make on technology, compliance and servicing.
The industry’s counter-proposal
NBFCs have suggested a phased reduction in commissions from the present level of 45-49% to 25% over five years. FIDC said lenders would bring down their commission structures on their own, from the current high 40s to what it called an acceptable 25%.
The body pointed out that insurance manufacturers have been given a five-year glide path to align their expenses of management. In its letter, it said NBFCs acting as distributors deserve a similar period to reduce their commission structures.
Warning on viability and jobs
FIDC told IRDAI that the proposed payouts would sharply squeeze margins and fail to cover even the marginal cost of distribution. In its view, this would leave lenders facing a viability problem.
It warned that NBFCs might choose to scale back or leave their insurance distribution business altogether. That could lead to job losses among salaried staff who handle insurance sales and servicing.
Impact on small agents
The industry body also highlighted the effect on Point-of-Sale Persons (PoSPs), of whom more than 1.4 million depend on micro-commissions. According to FIDC, the proposed caps would cut their earnings per transaction by around 90%.
As an example, it said the payout on a standard two-wheeler package policy would fall from ₹1,000 to ₹100. That, it argued, would make micro-entrepreneurship unworkable for these agents.
Concern over insurance penetration
FIDC said the caps could undermine the distribution network needed to widen insurance coverage, especially in rural and semi-urban areas.
If lenders stop acting as corporate agents because the payouts are too low, borrowers would receive less counselling on insurance, the council said. This in turn would reduce insurance penetration.
The submission comes as IRDAI has extended the deadline for feedback on its proposals to October 31.