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India’s insurance sector holds great promise for global companies, given its low penetration rate and the resulting liberalization reforms in the industry. But recently proposed rules reintroducing fee caps could throw a damper on insurers’ plans.
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Global insurers, which had been eager to gain further access to the world’s 10th largest insurance market since the sector was allowed 100% foreign ownership in December last year, are facing a rude surprise as the country’s regulator plans to reverse one of its key reforms.
India’s insurance regulator last week proposed reintroducing product-level fee caps, reversing a 2023 policy that would have given insurers flexibility in fee structures.
Although India’s insurance market remains a long-term opportunity, experts warn that operational complexities brought about by frequent policy changes will cause foreign investors to pause their plans. If the proposals are agreed, insurers would have until the year ending March 2029 to comply.
NEW DELHI, INDIA – JULY 14: Commuters are confused about where to go as traffic jams ahead on the UP link road near Mayur Vihar Phase-I during heavy rains on July 14, 2021 in New Delhi, India.
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Debashish Banerjee, partner and head of insurance at Deloitte India, told CNBC that the market is ready for cross-border trading activities after the foreign direct investment limit was raised to 100%.
However, trading will be suspended as foreign insurers’ management and boards need to deliberate on recent changes, he said, adding that more importantly, the discussion hinges on “what happens if there is another policy change in six months’ time.”
On Sept. 23, regulators proposed new rules that would reinstate commission caps, tighten expense control limits and restructure compensation to reward policy renewals rather than upfront sales volume.
State-owned enterprises such as Life Insurance Co., Ltd., SBI Life and new india assurance Local media reports say it is already operating within the proposed cap. However, other insurers need to significantly reduce their total administrative costs, according to Indian credit rating agency Care Edge.
According to Care Ratings, the proposal calls for private life insurers to reduce their total administrative expenses from 20% to 15% of their total direct premium income within two years and to 12.5% within five years, and for general insurance companies to reduce their total administrative expenses from 30% to 20% over five years.
The agency said, “20 out of 22 life insurance companies and 28 out of 31 non-life insurance companies are exceeding the proposed cap on expenses for FY2029.”
insurance companies take a hit
Currently, the fee structure is very upfront, with almost 35% to 40% paid upfront to agents and brokers, which leads to misselling of many insurance products, Ramkumar Subramanian, insurance partner at Grant Thornton Bharat, told CNBC.
He said regulators hope to stem this trend through the proposed changes.
However, the market was not thrilled with this announcement. A day after new rules were proposed, India’s largest online platform for insurance contracts PB Fintech Stock prices plummeted 36%. HDFC Life fell more than 6%, Aishichi Life Insurance It fell 4%.
Citi said in a note that if implemented “substantially in its current form,” the new rules could compress insurance distribution economics by 70-90% for banks and non-bank financial sector companies in several high-margin categories.
The regulator said the changes made in 2023 are “conceptually sound” but “do not fully achieve their objectives”. It added that the removal of the commission cap has increased commissions, especially for private life and non-life insurance companies compared to government-backed insurance companies.
long term commitment
Mohammad Hassan, head of Asia-Pacific equity dividend forecasting at S&P Global Market Intelligence, told CNBC that there are long-term expectations for India’s insurance market as only 3.7% of the country’s population has insurance policies, compared to the global average of 7.3%. As a result, foreign insurance companies are keen to enter the market and expand their presence, he said.
In May, UK-based Prudential acquired a 75% stake in India’s Bharti Life Insurance Company, and a month later Aviva acquired the remaining 25% stake.
Several other global insurance companies, including AXA, Chubb, Allianz and Old Mutual, are also considering investing in the country’s insurance sector, according to local media reports.
Sales commissions are subject to strict caps, which could make it difficult for insurers to grow. Distribution channels play an important role in the sale of financial products such as insurance, which are considered push products, but their fees are the subject of controversy with regulators in several countries.
Chubb and Axa did not respond to CNBC’s requests for comment.
Mr. Subramanian said the insurance industry is currently grappling with “blanket caps” introduced by regulators that do not take into account differences in gestational age or product complexity.
According to IRDAI’s annual report for the year ending March 2025, India’s insurance penetration rate remained unchanged from the previous year at 3.7%, life insurance penetration rate declined from 2.8% to 2.7%, and non-life insurance penetration rate remained at 1%.
Regulators hope the latest regulations will help businesses expand the adoption of insurance products. However, the Insurance Brokers Association of India warned that “insurance companies and brokers may find it difficult to reach customers in smaller towns and cities if the commission cap is below the cost of servicing customers,” according to local media reports.
The regulator’s latest move could be a “net win” for foreign insurers if it makes their insurance products more attractive to customers, while squeezing distributors’ profits. But for now, experts said, these policies are exacerbating operational challenges, especially for global insurers in markets where price points are much lower than in most mature markets.
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