Last week, the Insurance Regulatory & Development Authority of India (IRDAI) published the draft of a major policy revamp under their consideration. IRDA stated, though not in as many words, that their earlier experiment with light-touch regulation by conferring greater pricing autonomy to the regulated entities has failed, and they want to walk back to the earlier days of scruff-neck regulations. Though it was positioned as a discussion paper, the market apprehended, rightly, that most of the proposals would find their way to the final regulation, and priced in the expected impact of these proposals into stock valuations. That repricing resulted in a mini bloodbath in the market; value of stocks in the insurance and allied sectors tumbled en-masse. As per reports in different media channels, 1.2 to 1.5 trillion rupees of investor value was wiped out in the two trading sessions following the announcement. At a realistic estimate, at least 25% of these losses, i.e. thirty-thousand crores rupees, may remain permanently embedded in the valuations of the affected companies, causing corresponding real erosion in investor net-worth. This is not a notional loss, these losses would show up subtly in the portfolio values shown against our demat accounts, the NAVs of the mutual funds we hold, and the future cost of capital of the affected companies, all in the name of protecting investors.
We have seen the damage, now let us look at the problem statement made by the regulator as the justification for wielding the whip. The regulatory ire was about the excessive rise in commissions and other incentives paid by insurance companies to their agents, brokers and other distributors after the 2023 deregulation. According to the IRDA paper, insurance premiums in 2025 grew by only 6.8% while commission payouts grew by 18%, which is flagged as a major worry. But a nuanced look at the numbers tells a slightly different story. As per FY25 data, the total payout to such intermediaries was around Rs.1.08 trillion (lakh crores) against the total premium of around Rs.12.3 trillion across all products, life and non-life, or around 9% of the premium collected. IRDA’s contention is that this average hides many outliers and the first-year payout on certain policies even exceeds 30%. Such outliers are certainly a matter of concern, but the ideal regulatory tool to be used to counter such anomalies is the nudge and not a sledge hammer, at least not in the first instance and certainly not across all insurers, especially when the numbers clearly show that the overall policy premiums have actually come down over the years.
