Life insurers face earnings reset as IRDAI proposes to tighten expense caps, say analysts

As per the latest business developments, Life insurance firms could be headed for an earnings reset as the Insurance Regulatory and Development Authority of India’s (IRDAI) proposed changes to expense and commission limits would materially alter the economics of distribution, market watchers stated. Softer commissions and tighter expense controls is likely to slower business expansion, particularly in credit-linked products and channels that at present carry high distribution costs. Market watchers additionally expect the impact to vary significantly across insurers depending on their existing cost structures.

Expense ratios face a sharp reset

Under the proposed framework, insurers will move from product-level expense limits to a firm-level cap. The total expense ratio, or the share of premium an insurer spends on commissions, operating costs and other expenses, will have to decline to 15 percent in two years and 12.5 percent in five years. Insurers that were already below the proposed benchmark in FY25 will face a softer 10 percent ceiling.

Systematix estimates that private life insurers had an expense ratio of around 20 percent in FY26, implying a potential 500-750 basis point squeeze under the proposed framework.

“The bigger offering is design,” Systematix stated, pointing out that a single firm-level ratio does not fully account for differences in product mix, including term insurance, savings, ULIPs and annuities, or the mix between single-premium and regular-premium business.

This could force insurers with elevated expense ratios to either reduce commissions paid to distributors, control operating expenses or change their product and distribution mix.

Max Life, HDFC Life and IPRU face a bigger adjustment

The extent of the earnings reset becomes clearer when FY26 expense ratios are compared with the proposed limits.

According to Centrum Broking, Axis Max Life had the highest total expense ratio among listed insurers at 25.1 percent in FY26, comprising a 10.5 percent commission ratio and 14.6 percent operating expense ratio. The commission ratio reveals how much of the premium goes towards commissions paid to distributors, while the operating expense ratio captures the insurer's other operating costs. This compares with the proposed 15 percent limit by FY29 and 12.5 percent by FY32.

HDFC Life’s total expense ratio stood at 21.2 percent, while ICICI Prudential Life was at 18.1 percent. Canara HSBC Life noted an expense ratio of 18.7 percent.

Centrum noted that HDFC Life operates above the proposed expense limits, but anticipates softer commission rates, particularly in credit life, to provide cost relief. For ICICI Prudential Life, the brokerage stated credit life exposure could weigh on near-term annualised premium equivalent expansion, although softer commission costs and a greater focus on retail protection could backing efficiency.

At the other end, SBI Life and LIC enter the proposed regime with substantially softer cost structures. SBI Life’s FY26 total expense ratio was 10.6 percent, while LIC’s stood at 11.9 percent, both below the proposed 15 percent FY29 ceiling. “SBI Life’s lean cost structure gives it a firm competitive edge, shielding it from regulatory headwinds,” Centrum stated.

Margins could improve, but expansion may take a hit

Motilal Oswal anticipates the regulatory changes to create a clear trade-off for life insurers. Softer distribution costs should improve product-level profitability and VNB margins, the earnings an insurer anticipates to generate from the new policies it sells but business volumes could slow in the medium term.

“We expect product-level profitability to improve,” Motilal Oswal stated, while cautioning that “business volumes could be impacted in the medium term”, with credit life likely to see particular stress.

Systematix additionally anticipates the proposed framework to be negative for most private life insurers in the near term, although it stated the eventual impact could change if IRDAI revisits the caps based on product and premium mix.

The proposed commission grid is particularly significant for distributors. For regular-pay term insurance, commissions would be capped at 25 percent for insurance distribution entities and 30 percent for agents, compared with much elevated payouts at present noted in some channels.

For credit life sold by lenders, the proposed commission is as low as 2 percent for single-pay policies and 2.5 percent in the first year for regular-pay policies, while Systematix noted that observed payouts have been close to 45 percent.

Distributors face the sharpest disruption

The changes could as a result extend beyond insurers to banks, brokers and digital insurance distributors.

Motilal Oswal stated “distributors are likely to face the biggest impact” if the regulations are implemented in their proposed form, with take rates, which is the share of premium or topline retained by a distributor potentially falling meaningfully in new health and motor third-party insurance business.

For PB Fintech, Centrum highlighted a similar earnings risk. The brokerage stated average commissions on new retail health policies were around 24 percent, with the maximum reaching 70 percent, while new pure-term policies carried an average commission of 51 percent, with the maximum as high as 81 percent.

Against this, the proposed commission caps are 15 percent for IDEs and 20 percent for agents for new health business, and 25 percent and 30 percent respectively for term insurance.

Centrum stated PB Fintech’s anticipated 25-30 percent topline expansion in FY28-FY29 and 30-40 percent net earnings expansion could face a “meaningful risk” of estimates being de-rated if the new commission structure materially weakens distributor economics.