IRDAI Chairman Ajay Seth said the proposed changes aim to make insurers and distributors more productive while improving competition and value for policyholders.

IRDAI Chairman Ajay Seth said the regulator’s consultation paper on recalibrating the economics of insurance distribution is aimed at making the entire insurance sector more efficient and productive, rather than focusing only on distribution costs. Speaking exclusively to CNBC-TV18 at its Market Forum event, Seth said the paper seeks to align the economics of insurers, distributors and the regulator with the interests of policyholders.

Seth said the initial feedback from insurance company CEOs had been positive, with suggestions being offered as part of the consultation process. He said the proposals on expenses and segmental commission limits were driven by a rise in the cost of doing business in insurance. The objective, he said, is to first restore efficiency levels seen six to eight years ago and then improve productivity further.

The chairman said the framework also seeks to increase competition by lowering entry barriers and creating more opportunities for distributors. He defended differentiated commission limits for insurance distribution platforms and individual distributors, saying the distinction is primarily between open and closed architecture. He also outlined wider opportunities for point-of-sale persons, including selling more complex insurance products and certain non-insurance products.

Seth said additional commission provisions for smaller towns and cities, along with the expansion of the POSP network, were intended to improve insurance access in underserved areas. He said common service centres, banking correspondents and other local networks could play a larger role in distributing insurance.

On commissions, Seth pointed to sharp increases in distribution costs and said the ultimate objective was to improve value for policyholders. “The touchstone for those decisions has to be: Does it serve the policyholders better?” he said, while rejecting the idea that the consultation paper had deliberately taken an extreme position to negotiate a compromise later.

The chairman also defended lower renewal commissions in health insurance, arguing that renewals require less effort than acquiring a policy for the first time. He said health insurance, in particular, needs greater cost efficiency. On motor insurance, he explained the different commission treatment for mandatory third-party cover and other components of motor insurance.

Seth said commission disclosure for large commercial insurance policies was intended to make the cost of buying financial protection more transparent, while allowing room for higher fees where complex risk assessment warranted it.

On digital sales practices, he said customers should be able to access product details and pricing without first surrendering personal information. “Everybody has a right to know the price,” Seth said.

He also said lower initial acquisition costs could eventually improve surrender values in life insurance, while noting that ULIPs and pure protection products should not be treated as the same category. Overall, Seth said the consultation is intended to create a smoother transition towards a more cost-efficient insurance industry, with policyholder value as the central consideration. This is the excerpt of the interview.

Q: It's been a few days since the paper has come out. Before I get into talking about some of the nuances, the nitty-gritty of the paper itself, what's been the feedback like, if I can ask you that?

Ajay Seth: Feedback from two channels. I have been meeting a smaller group of insurers so far. I met, on the 26th, eight of the insurer CEOs of different life, non-life, and health insurers. Today again in the morning, I met nine of them, and all of them are supportive. They have a few suggestions, but all of them are supportive. In the coming days, I'll be meeting almost all of them, and on the fifth, I'll be meeting CEOs in Delhi, and so on in the process.

So it has been a positive one. Generally, in the media, which all of you will be knowing better, it has been supported, but there have been a few suggestions. And as the purpose of bringing out the consultation paper is to generate an informed public discourse, I'm glad that discourse is happening.

Q: Just one follow-up to that: Have those discussions brought out some things which you would like to reconsider? Is there something top of mind, just in terms of feedback? What are you getting, a point or two points or three? Everyone agrees with the direction of travel and what you're trying to do here, but just in terms of the way or what you're proposing, are there any changes which come to your mind?

Ajay Seth: I don't get that sense. It has been a supportive one, and I would also like to clarify the way one aspect of the way you said that: bring down the cost of distribution. This paper is not merely about distribution. In fact, it lays the foundation for a far more efficient insurance sector, which really is positioned to serve our journey for Viksit Bharat, and saying that the entire sector has to become far more productive. All stakeholders have to become much more cost-efficient, be it the insurer, be it the distributor, and be it the regulator. So it is about everybody becoming far more productive.

That is what this paper is all about. Q: So there are no big points of pushback, in that sense, that you've sensed, and you said you've met almost about 16-17 CEOs so far.

Ajay Seth: That's correct. And in fact, the title of this paper has also been chosen with a lot of care, it is not just by care, but what it represents: recalibrating the economics. Any sector, or I'll put it in this manner, a sector, be it a financial sector or a real economy sector, which has got its economics right for its consumers, for its suppliers, for the entire eco-chain, has prospered by leaps and bounds. So this paper attempts to get the economics of the sector right. Q: I want to straight talk about the two major segments that the paper talks about to start with. One is, of course, rationalisation of expenses, which insurance companies do, and the second one is reintroduction of segmental limits.

You know, there's one segment that I've been speaking to. They are of the view that, you know, if you would have rationalised expenses, the commissions would have automatically come down because there's only so much of operating expense which a company does. Why, according to you, was a combination of both those things important, rationalisation of EOM as well as bringing segmental conditions? Ajay Seth: Again, to put it into proper perspective, a much better value for policyholders is possible only through much better competition in the market and a lot more players in the distribution space.

In terms of the structural simplification, easing up entry, creating more opportunities for business and income is the first step here. Some of the stakeholders have straightaway jumped to the limits, but look at it in the manner that the cost of capital required for a broker has been brought down from ₹75 lakh to ₹10 lakh. Fee has already been reduced by two-thirds, and then coming to these segments, the two which you talked about, it is not that the limits were not there earlier.

The 2015 amendment shifted the limits from the Act to the regulations. They continued in the regulations. In life insurance, they continue even now. For general insurance, they were removed in 2023. But what has been the outcome? Pre-2023 as well as post-2023, market conduct was not aligned with the policyholders' interest. There were significant workarounds. Total cost went up. Commission rates went up.

To talk about specific numbers, the life insurance industry in FY21 cost of doing business was 16.5%. Not that in other years it was very high. It used to be high, 20%-plus. It had come down to 17%, 16% in that range. It is back even more to 22%. So the first step we are saying is, go back where you were five-six years back and say about 15%.

General insurance used to be 30% plus, came down to 26%, a few decimal points here and there, and stayed there for three years, FY17, FY18, FY19. Today it is 32%. We are saying, please go back where you were. You were far more efficient in the past, and our aspiration of Viksit Bharat requires us to be far more productive. So first, we have to regain how productive we were just about seven-eight years back, and then look for the next milestone of how we can become even more productive.

Q: Other theme that, of course, you speak about in the paper is the distinction between IDPs and IDEs. Essentially, entities and persons. You know, another suggestion that we've heard from a quarter of the industry is that why is the regulator thinking that IDEs don't put in as much effort as IDPs, right? And hence, why is the commission limit lower for IDEs over IDPs? I want to understand from you. They also say that we put money in skilling people, in marketing, awareness.

Then our efforts are just different kinds of efforts. Does the regulator see that? Ajay Seth: I'll request those who have got that impression to read the paper once again and from where, what was the thought process? IDEs, by design, are in open architecture; they can sell competing products.

IDPs, especially the agent, not the POSP, who are tied with IDE, agents and associates can sell products of only the insurer with whom they are tied up. Now, where does it change the effort part? In an attempt to sell an insurance product, first is to go to a prospective customer and convince that customer that that person requires financial resilience and that insurance is good for that person. Step one.

That both have to do. Next step is to check what are the exact financial needs of that person and give a suitable product. It is quite possible that the product which an agent or an associate may have, or for that matter, an insurer may have, doesn't suit that person. The first step is gone because only one choice is available. On the other hand, an IDE says, I have got products from 5, 10, 20 entities. Even a bank can say I have got products from nine entities. This is a bouquet, this is a range of products available.

Among them, these two, three we find that are good for you. Please select one of them. It can offer more choice. The second step can become far easier because the customer also feels, "Hey, I've got a choice." Whereas, closed architecture, single choice.

That is the attempt that in IDE, somewhat lower, and in IDP, those who are—Is it not a question of IDE versus IDP? It is more of a closed and open architecture. Just look at it in this manner. The Sabka Bima Sabki Raksha Act has brought back a provision for a proper regulation of commissions in the structure, which was not there. It has been introduced specifically this year to make sure that we have those forward-looking reforms.