Talk of possible changes to commissions on insurance products has resurfaced on Dalal Street, reviving concerns around distributor economics and the knock-on effects for insurers. While the market has so far remained relatively calm, analysts warn that the issue may not be fully reflected in stock prices, leaving room for sharp reactions if regulatory action materialises.
In a conversation with ET Now, Manas Agrawal from Bernstein India highlighted that any reduction or deferral in commissions is unlikely to have an impact on insurance penetration comparable to the GST cut. According to him, while GST reductions directly lowered costs for consumers and widened affordability, commission changes may not translate into a similar price benefit.
“Any potential changes in commissions will not likely bring about as much volume uptake as GST has broadened because the cost to consumer might not go down as much and therefore this will bring in more people in the affordability track, but it may hurt volumes for distributors and for insurers if there are cuts. Deferrals might be a better way to approach the idea but there is a sense that the regulator wants to bring down commissions and will do something about it in the near future, that is what the report talks about,” Agrawal said.
He added that the market may be underestimating the impact of such a move. “So essentially, what we are talking about is the impact if something like this is implemented is large and stock prices are not reflecting that. So, either the street thinks that this is not going to happen or if this happens then the street will get probably caught off guard and prices will have to then suddenly react to those news items.”
On general insurance, particularly motor third-party pricing, Agrawal chose to stay away from speculation. “I will have to decline a comment. I do not cover general insurers and for that reason I cannot comment, but you are right media has been talking about it but it has not come through,” he noted.
Looking ahead to the December quarter, Agrawal struck an optimistic tone on fundamentals, pointing to early data already showing momentum. “So, we already have monthly numbers coming in from insurers and we have seen strong momentum on health. The term plan momentum does not show up because term plan is a small part of overall APE growth for life insurers, but then if you see number of policies sold and sum assured, you see that momentum over there as well.”
He added that channel checks suggest healthy traction in protection products, particularly term and health insurance. While product-level profitability has moderated, he believes volumes will more than compensate. “Your product-level profitability has come down and therefore take rates may come down a bit but then the volume will be more than enough to cover up any drain on revenues or on bottom lines for Q3 and which is why insurer stocks have been doing well.”Policybazaar, the only listed insurance distributor, has been an exception, with its stock under pressure amid regulatory uncertainty. Still, Agrawal expects the upcoming quarter to remain strong even for the platform. “I do expect Q3 fundamentally to be strong even for Policybazaar.”
On the potential fallout of a commission cut, Agrawal acknowledged the directional risk to distributors. “So, if something is to happen one, we do not know what is the modality, how much of a cut or a deferral we are talking about, so hard to talk numbers but yes, directionally it will hurt distributors. If it is a deep cut, it will also hurt insurers in terms of volume growth is my view.”
He stressed that the outcome will depend on the final shape of the regulator’s consultation. “I do believe that the regulator will take feedback from the industry and commissions are where they are because the product needs a push and an incentive for distributors… If there is a cut without adequate enough volume uptick, then yes, Policybazaar’s top line will see some pressure and the bottom line is somewhat sensitive to topline changes.”
Another perceived headwind is Bima Sugam, the regulator-backed portal aimed at offering a unified platform for buying insurance. Agrawal, however, downplayed near-term risks. “I do not necessarily think Bima Sugam is going to become a big challenge for Policybazaar in the near term. Insurance is a complicated product where you need people to handhold you during the process of sale and even after sale.”
While acknowledging parallels with the rise of direct mutual fund plans, he cautioned against drawing straight-line comparisons. “I do think insurance is a far more complicated product than mutual funds and therefore I am not very sure if I would expect such a strong outcome.”
In terms of investment strategy, Agrawal said regulatory uncertainty has shifted his preference. “Generally, I like distributors over the insurers but at this point in time given the regulatory possibilities and where valuations are, I would still play life insurers over distributors.”
Within life insurance, he named his preferred picks clearly. “I like Max, I like SBI Life. I do not have a problem with people buying into HDFC Life. ICICI and LIC, I would like to see more indications that topline momentum is going to improve.”
For now, strong quarterly momentum is providing comfort, but with commissions under the scanner, the insurance sector may be entering a phase where regulatory signals matter as much as growth numbers.