IRDAI Insurance Reforms may increase the returns earned by customers on traditional life insurance savings policies.
The proposed changes aim to reduce distribution costs, agent commissions and expense management limits for insurance companies, with the savings potentially passed on to policyholders.
The Insurance Regulatory and Development Authority of India has proposed reducing the expense of management (EoM) limits for life insurance companies in phases.
The proposal is currently under consultation, so the final rules and rates may change after industry feedback.
IRDAI Insurance Reforms target lower expenses
Under the proposal, the EoM limit for life insurance companies could be reduced to 15% by FY29. It could then be lowered further to 12.5% by FY32.
IRDAI had introduced an overall EoM ceiling in 2023 instead of imposing separate limits on individual products.
This gave insurers greater flexibility in allocating expenses across their products. The latest proposal seeks to tighten these limits further.
The proposed reduction in expenses could benefit customers if insurers pass the savings through higher maturity benefits.
Industry estimates suggest that returns on some traditional savings policies could improve by up to 100 basis points.
How much could insurance returns increase
Traditional savings life insurance policies currently offer average annual returns of around 5% to 6%, according to the information provided in the consultation-related estimates.
For a policy with a five-year premium payment term and a 10-year policy term, the estimated IRR could improve by around 80 to 100 basis points.
For example, if a 35-year-old pays an annual premium of ₹1 lakh for five years with 10 times the death cover, the maturity amount could rise from around ₹6.5 lakh to ₹7.1 lakh.
This would represent an estimated additional maturity benefit of about ₹60,000 compared with the current illustration.
For a policy with a 10-year premium payment term and a 20-year policy term, the estimated IRR could increase by around 50 to 60 basis points.
In the example provided, an annual premium of ₹1 lakh for 10 years could result in a maturity amount of around ₹24.5 lakh instead of ₹22.25 lakh.
The estimated difference in maturity benefits in this example is around ₹2.25 lakh.
Proposed changes to agent commissions
The consultation paper also proposes new first-year maximum commission limits for linked and non-linked policies.
The proposed limits would vary according to the premium payment term and would apply separately to distribution entities and agents.
For policies with a premium payment term of less than five years, the proposed maximum commission is 5% for distribution entities and 6.25% for agents.
For premium payment terms of more than five years, the proposed cap is 10% for distribution entities and 12.5% for agents. For policies with a six-to-eight-year premium payment term, the proposed limits are 14% and 17.5%, respectively.
For a nine-year premium payment term, the proposed maximum commission would be 18% for distribution entities and 22.5% for agents.
For policies with a premium payment term of 10 years or more, the proposed limits are 20% for distribution entities and 25% for agents.
Final insurance rules are yet to be decided
The proposed changes are part of IRDAI’s consultation process and are not final rules at this stage. The final commission limits, expense limits and other provisions may change after feedback from the insurance industry and other stakeholders.
For policyholders, the key issue will be whether lower distribution and management costs translate into higher maturity benefits and better effective returns on traditional savings insurance products
