IRDAI draft consultation paper: SBI Life ‘Buy’ best placed as EOM caps tighten, says Nomura

Reports coming in for today mention that The IRDAI's draft consultation paper on insurance distribution reforms proposes two key changes – tighter Expenses of Management (EOM) caps with a revision in their definition and the reintroduction of commission caps across products, channels and geographies, according to Nomura.

The brokerage stated commission caps proposed for general and health insurance are "quite steep vs life insurance", while within life insurance there is "leniency with agents vs all other distributors".

Based on the "steep EOM caps proposed for both life and general insurance", Nomura believes SBI Life, which it rates 'Buy', "stands as best placed" among insurers under its coverage as its current EOM ratio is the most comfortable.

IRDAI has proposed a five-year glide path for the stricter EOM limits. General and standalone health insurers at present have EOM caps of 30% and 35%, respectively, which are proposed to come down to 20% over five years. For life insurers, EOM caps are being redefined, with insurers required to achieve 10-12.5% EOM over the same period. "Only SBI Life and LIC are close to the proposed EOM caps," Nomura stated.

The regulator has additionally proposed a simplified distribution architecture with insurance distribution entities (IDEs), including banks, NBFCs and brokers, and insurance distribution persons (IDPs), including agents. IDPs will stay under closed architecture, while IDEs will have the option, but not obligation, to adopt open architecture. "This should lend relief to SBI Life and Kotak Life," Nomura stated.

For life insurance, proposed commission caps are stricter than earlier caps, although agents get a "similar or better structure vs erstwhile commission structures" for products such as individual pure term insurance. Nomura stated agency expansion scheduled by covered insurers "will only get accelerated now".

For general insurance, third-party motor commissions to garages and IDEs are proposed at nil versus 2.5% earlier. Health insurance commission caps are additionally stricter. While this could help insurers meet EOM caps, Nomura stated, "we worry around the motivation of health insurance distributors".

For Policybazaar, which Nomura rates 'Neutral', 70% of FY26F topline came from health and protection. That stated, distributors have been given relief by being allowed to sell non-insurance financial products.