Banks may rejig insurance sales as Irdai proposes sharp commission cuts |

Those with stakes in insurers may also have greater incentive to steer business towards group companies, where they can potentially manage the economics more effectively.

Irdai earlier this week proposed a broad reset of insurance distribution economics, including lower expense-of-management limits and product- and channel-specific commission caps. It also proposed separate caps for individual and corporate distributors, with higher limits for individuals on the grounds that their sales involve greater effort.

Motor insurance commissions could be capped at 0-15 per cent, compared with 26 per cent, while savings products could attract commissions of 5-25 per cent, against prevailing rates of 14-37 per cent.

Together with tighter treatment of indirect payments to distributors and greater transparency, the proposals are expected to materially change the economics of insurance distribution, particularly for banks and other large corporate distributors. “If there are aspects of the product mix they want to encourage — such as more long-term products, back-ended commissions and better commissions for protection products — a combination of product mix, tenor mix and higher volumes should mitigate a large part of the impact. The other lever is cost. If commission income falls, the associated costs can also be reduced,” a senior banker at a large private sector bank said.

According to IIFL Capital, the impact on banks’ profit after tax is likely to be in the low single digits because bancassurance contributes relatively little to overall earnings. The brokerage estimates that the banking system’s bancassurance income pool was about $2.2 billion, after growing at a compound annual rate of 28 per cent over the past three years.

Bancassurance contributes about 10 per cent of banks’ fee income, nearly 3 per cent of profit after tax and roughly 6 basis points of return on assets, it said.

The effect will vary significantly among lenders. Among larger private sector banks, bancassurance contributes most at Axis Bank, followed by HDFC Bank and Kotak Mahindra Bank, while the contribution is lower at state-owned lenders and ICICI Bank.

At Bandhan Bank, bancassurance accounts for 26 per cent of total fee income, followed by 20 per cent at AU Small Finance Bank. The contribution is 17 per cent at HDFC Bank, 16 per cent at IndusInd Bank and 15 per cent each at Axis Bank and Yes Bank. For most public sector banks, it is between 5 per cent and 7 per cent, while at ICICI Bank it is about 2 per cent.

“A bank’s fee-to-assets…