Those with stakes in insurers may also have greater incentive to steer business towards group companies, where they can potentially manage the economics more effectively.
Irdai earlier this week proposed a broad reset of insurance distribution economics, including lower expense-of-management limits and product- and channel-specific commission caps. It also proposed separate caps for individual and corporate distributors, with higher limits for individuals on the grounds that their sales involve greater effort.
Motor insurance commissions could be capped at 0-15 per cent, compared with 26 per cent, while savings products could attract commissions of 5-25 per cent, against prevailing rates of 14-37 per cent.
Together with tighter treatment of indirect payments to distributors and greater transparency, the proposals are expected to materially change the economics of insurance distribution, particularly for banks and other large corporate distributors. “If there are aspects of the product mix they want to encourage — such as more long-term products, back-ended commissions and better commissions for protection products — a combination of product mix, tenor mix and higher volumes should mitigate a large part of the impact. The other lever is cost. If commission income falls, the associated costs can also be reduced,” a senior banker at a large private sector bank said.
According to IIFL Capital, the impact on banks’ profit after tax is likely to be in the low single digits because bancassurance contributes relatively little to overall earnings. The brokerage estimates that the banking system’s bancassurance income pool was about $2.2 billion, after growing at a compound annual rate of 28 per cent over the past three years.
Bancassurance contributes about 10 per cent of banks’ fee income, nearly 3 per cent of profit after tax and roughly 6 basis points of return on assets, it said.
The effect will vary significantly among lenders. Among larger private sector banks, bancassurance contributes most at Axis Bank, followed by HDFC Bank and Kotak Mahindra Bank, while the contribution is lower at state-owned lenders and ICICI Bank.
At Bandhan Bank, bancassurance accounts for 26 per cent of total fee income, followed by 20 per cent at AU Small Finance Bank. The contribution is 17 per cent at HDFC Bank, 16 per cent at IndusInd Bank and 15 per cent each at Axis Bank and Yes Bank. For most public sector banks, it is between 5 per cent and 7 per cent, while at ICICI Bank it is about 2 per cent.
“A bank’s fee-to-assets and cost-to-assets ratios are directly linked. If fee-to-assets comes down, we can correspondingly bring down cost-to-assets, helping contain the impact on RoA (return on assets),” the banker said.
Banks would need to recalibrate their product and tenor mix, volume assumptions and costs, the banker added. “It will require some re-engineering of the business model, but eventually we should be able to return to some level of stability.”
The proposals could also prompt lenders to revisit their insurance partnerships.
“If commissions come down and the economics become more challenging, banks could potentially allocate more business to insurers in which they have an equity partnership, where they may be able to manage the economics better,” the banker said.
A senior banker at a state-owned lender said the proposed norms could weigh on fee income in the near term. If the final rules remain broadly similar, banks could increase their focus on other third-party products to compensate for lower insurance income, or redirect resources towards core banking and treasury operations.
“Banks will change their strategies for distribution considering lower income. They will take a more selective approach based on products, sales efforts and customer engagement. They might either turn their focus to core banking or prioritise other products and services with better economics,” a senior executive at a private sector life insurer said.
CareEdge said the proposed caps could materially alter bancassurance economics. For multi-partner banks, first-year payouts could fall by about 40 per cent, reducing the value insurers place on competing for distribution space and shifting competition towards service, product fit and integration.
In general insurance, banks source only about 5 per cent of premiums but earn commissions of roughly 26 per cent, leaving payouts particularly exposed to a sharp reduction under the proposed framework. Restrictions on compulsory bundling and volume-linked staff incentives could further constrain branch-led sales.
“The impact on bank profitability is modest in aggregate but material for smaller banks that depend heavily on insurance fees. A key indicator to watch is whether multi-tie-up banks consolidate to fewer partners,” CareEdge said.
