Synopsis

Insurers like Life Insurance Corp and SBI Life need to improve cost efficiencies under new regulatory guidelines. The proposals suggest lowering the expense of management limit from around 16% to 12.5% within five years. While larger insurers are compliant, they must reduce their efficiencies further. Smaller players might gain market share if they enhance their operations as well. The overall goal is to increase efficiency and value for policyholders.

IRDAI chairman Ajay Seth

Mumbai: Insurers such as Life Insurance Corp (LIC) and SBI Life, which already operate below the proposed expense of management (EOM) limits, should also seek further cost efficiencies, IRDAI chairman Ajay Seth said. Both insurers broadly operate within the thresholds proposed by the regulator.

If an insurer can operate at 12% EOM, there is scope for further improvement to bring it below 10%, he said, adding that smaller insurers could improve efficiency and overtake larger, established players.

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The regulator believes controlling EOM should improve efficiency and increase value for policyholders. "If an insurer is at 12%, that means it is possible to run a business model at that level. There is scope for improvement there as well," Seth told ET in an interview.

The regulator has proposed bringing life insurers to a company-level EOM limit of 12.5% of gross direct premium income over a five-year glide path from the current level of around 16%, with the eventual benchmark for some insurers moving lower. Seth said the objective was not merely to bring high-cost insurers within the regulatory ceiling but to move towards greater efficiency.

SBI Life's EOM is around 11%, while LIC's is around 12%, making them broadly compliant.

The two insurers would need to bring their EOM closer to 10% over the next five years.

Given SBI Life's relatively low-cost bancassurance model and LIC's agency-led distribution structure, this will be manageable for both of them, according to an Emkay report.

"Those who are at 20%, 22%, 25%, need to come to a more reasonable level. If the best-performing players can operate at a lower cost, others should also ask why they cannot do the same," Seth said.

The proposed framework could sharply reduce payouts on products sold through lenders. Commission on credit-life insurance could be capped at 2%, compared with about 28% currently and, in some cases, up to 45%.

Among banks, Macquarie said Axis Bank and HDFC Bank are more exposed than ICICI Bank and Kotak Mahindra Bank to the proposed changes because of the larger contribution of insurance fee income to their revenue and profit before tax. Most other NBFCs could face a 4%-8% hit, IIFL estimated, assuming lenders offset about half the impact through lower operating costs, fees or lending returns.

Also Read: IRDAI insurance commission curbs: Why the industry is facing a reckoning

For Axis Bank, bancassurance fee income rose to 2.4% of revenue in FY26 from 2.1% in FY25, while its contribution to profit before tax increased to 12.5% from 9.2%, according to Macquarie's analysis. For HDFC Bank, insurance fee income accounted for 1.9% of revenue and 7.3% of PBT in FY26, compared with 1.8% and 7.1%, respectively, a year ago.

By comparison, insurance fee income contributed 0.2% of revenue and 0.6% of PBT at ICICI Bank in FY26, while the corresponding figures for Kotak Mahindra Bank were 1.6% and 5.8%. At SBI, the contribution stood at 0.5% of revenue and 2.6% of PBT.

Seth said the efficiency drive could also alter competitive dynamics in the industry, with smaller insurers able to gain market share if they operate more efficiently.

"It is also not only about large companies. Smaller players can improve and overtake more established ones," he said.

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