Inside India newsletter: Foreign insurers get the red-carpet treatment — and policy uncertainty

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India's insurance sector has held a lot of promise for global companies, given low penetration rates and consequent reforms that have liberalized the industry. But recently proposed rules reintroducing commission caps could pour cold water on insurers' plans.

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Global insurers eager for a bigger slice of the world's 10th-largest insurance market, after it allowed for 100% foreign ownership in the sector last December, are in for a rude surprise as the country's regulator plans to reverse one of its key reforms.

Last week, India's insurance regulator proposed the reintroduction of product-level commission caps, reversing its move in 2023 that allowed insurers flexibility over their commission structures.

While India's insurance market remains a long-term opportunity, experts warned that operational complexities ushered in by the frequent shifts in policy will make foreign investors pause their plans. If the proposals are agreed upon, insurers will have to comply by year ending March 2029.

The market was primed for cross-border deal activity after the foreign direct investment limit was raised to 100%, Debashish Banerjee, partner and insurance sector leader at Deloitte India, told CNBC.

But deals will be paused as managements and boards of foreign insurers will need to deliberate on the recent changes, he said, adding that more importantly, discussions will hinge on "what if six months down the road there will be another policy change?"

On Sept. 23, the regulator proposed new rules that seek to reinstate commission caps, tighten expense management limits and restructure remunerations to reward policy renewals instead of upfront sales volume.

State-owned firms such as the Life Insurance Corporation, SBI Life and New India Assurance are already operating within the proposed caps, as per local media reports. Other insurance companies, however, will need to cut total management expenses sharply, according to Indian credit rating agency Care Edge.

The proposals require private life insurers to cut total management expenses from 20% to 15% of gross direct premium income within two years and to 12.5% within five years, and general insurers to reduce it from 30% to 20% over five years, according to Care Ratings said.

"20 of 22 life insurers and 28 of 31 general insurers are above the proposed FY29 expense ceiling," the agency said.

Currently, the commission structures are very front-ended, with almost 35%-40% being paid out up-front to agents and the middlemen, which led to a lot of mis-selling of insurance products, Ramkumar Subramanian, partner for insurance at Grant Thornton Bharat, told CNBC.

The regulator wants to arrest this trend through the proposed changes, he said.

The market, however, was not thrilled with the announcement. A day after the new rules were proposed, India's largest online platform for insurance policies PB Fintech saw shares crash 36%, HDFC Life fell more than 6% and ICICI Life Insurance dropped 4%.

The new rules, if implemented, "substantially in the current form," could compress insurance distribution economics for banks and non-banking financial sector companies by 70%-90% in several high-margin categories, Citi said in a note.

The regulator has said the changes made in 2023 were "conceptually sound" but have "under-delivered on its objectives." It added that the removal of commission caps has increased commissions, especially among the private life and general insurers, as compared to state-backed sector insurers.

India's insurance market holds long-term promise because only 3.7% of people have an insurance policy, compared to the global average of 7.3%, Mohammad Hassan, head of APAC equities dividend forecasting at S&P Global Market Intelligence, told CNBC. As a result, foreign insurance companies have been keen to enter and expand their presence in the market, he said.

In May, U.K.-based Prudential acquired a 75% stake in India's Bharti Life Insurance, while a month later, Aviva acquired the remaining 25% stake.

According to local media reports, several other global insurance companies such as AXA, Chubb, Allianz, and Old Mutual have also been looking to invest in the country's insurance sector.

With hard caps set on distribution commissions, it could be a challenge for insurance companies to grow. Distribution channels play a crucial role in selling financial products such as insurance, which are seen as push products, but their commission has been an issue of contention with regulators across several countries.

Chubb and Axa did not respond to CNBC's request for comments.

The insurance sector is now grappling with the "blanket-capping" introduced by the regulator that does not consider different gestation periods and complexities of products, Subramanian said.

As per IRDAI's annual report for the year ended March 2025, India's insurance penetration remained at 3.7%, unchanged from a year ago, as its life insurance penetration declined from 2.8% to 2.7% and non-life penetration remained at 1%.

The regulator expects the latest regulations to help companies improve the reach of insurance products. But the Insurance Brokers Association of India has warned that "commission caps below the cost of servicing customers could make it difficult for insurers and intermediaries to reach customers in smaller towns and cities," as per local media reports.

If the regulator's latest move manages to make insurance products more appetizing to customers — even as it crimps distributors' margins — it could be a "net-positive" for foreign insurers. But for now, they exacerbate the operational challenges, especially for global insurers in a market where price points are already much lower than most mature markets, experts said.

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