IRDAI Draft Rules: Impact on Insurance, Bank & NBFC Stocks

Indian financial stocks came under pressure on September 24 after IRDAI proposed a major overhaul of how insurance is sold and how distributors are paid. Life insurers, banks, NBFCs and insurance distributors all reacted negatively, but the financial impact is unlikely to be the same for everyone.

That distinction is important. For a bank or NBFC, insurance commission is largely fee income. For an insurance distributor such as Policybazaar, commission is a core source of revenue. But for an insurer, commission is an expense paid to acquire business. Cutting it could hurt sales growth, but it could also lower acquisition costs.

So the IRDAI proposals are not simply negative for the insurance sector. They could potentially redistribute profits across the entire insurance ecosystem.

What Has IRDAI Proposed in Its New Draft Rules?

IRDAI released a two-part consultation paper titled “Recalibrating Economics of Insurance Distribution” on September 23, 2026. The regulator wants to reduce insurance distribution costs, improve transparency and tackle mis-selling.

These are currently proposals, not final regulations. Stakeholders can submit feedback until October 25, 2026.

The biggest proposed changes include lower Expense of Management limits for insurers, product- and channel-specific commission caps, restrictions on compulsory insurance bundling with loans, tighter controls on incentives paid to bank and NBFC employees and stronger accountability for mis-selling.

For life insurers, IRDAI has proposed bringing company-level Expense of Management, or EoM, down to 15% of Gross Direct Premium Income within two years and 12.5% within five years.

For general insurers, the proposed EoM limit would fall from the existing 30% of Gross Written Premium framework to 20% of domestic GDPI over five years.

EoM essentially captures how much an insurer spends on running and distributing its business, including commissions and operating costs. A lower ceiling therefore forces insurers to become more cost-efficient. But the bigger immediate market concern is commissions.

Why Are Insurance Commissions at the Centre of the Problem?

IRDAI had moved towards a more flexible commission framework in 2023, allowing insurers greater freedom as long as total expenses remained within prescribed limits.

The regulator now appears concerned that this flexibility has resulted in distribution costs rising too quickly.

IRDAI data cited in the consultation process show why. In life insurance, average first-year commissions across products were reported in a wide range of roughly 14% to 51%, while maximum commissions in some cases reached much higher levels. For lending banks selling credit-life policies, average commissions ranged from around 5% to 41%, while NBFC commissions ranged from around 7% to 47%.

The regulator therefore wants commission levels to depend more directly on how complex a product is and how much effort is actually required to sell and service it.

For example, individual health insurance sold by a distribution entity could face a proposed first-year commission cap of 15%, falling to just 5% on renewal. Agents would have somewhat higher limits of 20% initially and 10% on renewal.

For motor third-party insurance, where customer awareness is already high and coverage is mandatory, the proposed commission for distribution entities is zero. Motor own-damage and related covers would also face substantially tighter limits.

This is an important change because IRDAI is effectively saying that a product which needs little selling effort should not generate the same economics for a distributor as a complicated product requiring advice and servicing.

That could change where profits are made across the insurance value chain.

Why Insurance Stocks Could Face Near-Term Pain but Long-Term Benefits

At first glance, lower commissions should be good for insurers.

Suppose an insurer collects ₹100 of premium and currently spends ₹20 acquiring that business through a distributor. If regulation brings the distribution cost down to ₹15 while the ₹100 premium remains unchanged, the insurer has saved ₹5.

That could theoretically support profitability. But insurance distribution is not that simple.

Banks, brokers and agents do much of the actual customer acquisition. If the commission paid for selling a particular product drops sharply, those distributors could become less aggressive in selling it or shift towards products where economics remain more attractive.

That creates a trade-off for insurers:

This explains why judging all insurance stocks as either beneficiaries or losers would be too simplistic.

Insurers with strong proprietary distribution networks, efficient agency channels and already-low expense ratios may find it easier to adapt.

Brokerage commentary following the proposal has generally viewed SBI Life and LIC as relatively better positioned than insurers with greater dependence on bancassurance and external distributors. HDFC Life and Max Financial have been cited among companies where distribution changes could have a greater effect, although the eventual impact will depend heavily on the final regulations.

In general insurance, the equation could be different again. Some brokerage assessments have viewed ICICI Lombard and Star Health as potentially better positioned if lower distribution costs eventually support margins and market-share gains.

The real question for insurance investors is therefore not simply whether commissions fall.

It is whether the insurer can retain its customer acquisition engine after commissions fall.

Why Banks Could Lose a Valuable Source of Fee Income

The impact on banks is more straightforward. Banks earn bancassurance commissions when they distribute life, health or general insurance products through branches, relationship managers and digital channels.

This is attractive income because the bank does not have to lend additional money or take meaningful credit risk to earn it.

That makes insurance distribution a relatively high-margin source of non-interest income. If commissions fall, that income falls directly.

Macquarie estimates cited after the consultation paper suggest that bancassurance fees are equivalent to roughly 12.5% of profit before tax for Axis Bank and about 7.3% for HDFC Bank.

In comparison, the estimated exposure is much lower at SBI and ICICI Bank, at below roughly 2.6% and 0.7% of PBT respectively.

This does not mean Axis Bank’s profit would suddenly decline 12.5%. The figure represents the relative size of bancassurance fee income against PBT, not a forecast that all of it disappears.

But it shows why investors reacted differently across banks.

The larger insurance distribution is relative to a bank’s overall earnings, the more important these rules become.

Why Loan-Linked Insurance Is an Even Bigger Issue for NBFCs

NBFCs face another layer of risk because insurance can be sold directly alongside loans.

Imagine a borrower takes a ₹10 lakh loan. The lender simultaneously sells credit-life insurance that can repay the outstanding loan if the borrower dies.

The borrower receives protection, the lender reduces credit risk and the NBFC can earn insurance distribution income.

The problem begins when the insurance becomes practically compulsory or when high commissions create an incentive to push policies regardless of whether the customer actually needs them.

IRDAI wants to prohibit compulsory bundling of insurance with loans. Borrowers would need to be clearly shown loan costs with and without insurance, and they should not be forced to purchase the policy through the lender itself.

More importantly for NBFC earnings, commissions for banks and lenders selling loan-linked insurance are proposed to be limited to roughly 2% to 5%, depending on the product.

That attacks the economics from two sides. First, the commission earned on each policy could fall.

Second, fewer borrowers may purchase insurance once the policy becomes clearly optional.

NBFCs with large retail lending franchises and meaningful credit-life distribution income could therefore face greater fee-income pressure.

This helps explain why L&T Finance came under particularly strong selling pressure on September 24, while Bajaj Finance and Cholamandalam Investment and Finance also declined during the session. L&T Finance was down more than 8% at one stage.

The long-term impact, however, will depend on how much insurance distribution actually contributes to each company’s total profitability.

Why PB Fintech May Be the Clearest Example of the Risk

The most dramatic market reaction came from PB Fintech, the parent of Policybazaar. Its shares fell roughly 30% intraday at one stage on September 24 after the proposals were announced.

Why was the reaction so much larger than that of most insurers? Because the economics are reversed.

When HDFC Life pays a commission, it records a distribution expense. When Policybazaar receives that commission, it records revenue.

Therefore, the same regulation that can lower acquisition costs for an insurer can directly compress revenue for an insurance distributor.

Macquarie estimated that a two-percentage-point compression in PB Fintech’s take-rate could reduce EBITDA by roughly 25%. Jefferies estimated that a 10% reduction in commission rates could lead to roughly a 10% to 12% earnings impact for PB Fintech and Turtlemint.

These are brokerage scenarios rather than company guidance, but they explain the market’s concern.

This is perhaps the clearest way to understand the entire regulatory change:

For distributors, commission is revenue. For banks and NBFCs, it is fee income. For insurers, it is a cost of acquiring customers.

That is why a single IRDAI proposal can have very different financial implications across stocks.

Could Customers Eventually Become the Biggest Beneficiaries?

There is also a longer-term angle that the stock-market sell-off can obscure.

IRDAI’s objective is not simply to cut profits across the financial sector. It wants insurance to become cheaper, more transparent and less dependent on aggressive sales incentives.

Lower distribution costs could eventually allow insurers to provide better pricing, improve returns on savings-linked products or invest more efficiently in customer servicing.

The prohibition on forced insurance bundling should also give borrowers more choice.

And by proposing that policies be traceable to the individual salesperson involved and allowing commission clawbacks where mis-selling is established, the regulator is trying to make aggressive selling financially costly.

The difficult question is whether reducing distribution incentives also slows insurance penetration, especially in a country where large parts of the population still need human assistance to understand and purchase insurance. That trade-off is what investors should watch.

What Should Investors Track Next?

• Final IRDAI regulations: The current framework is only a consultation paper. Industry feedback is open until October 25, and important commission limits could still change before implementation.
• Insurer distribution mix: Companies that depend heavily on banks and external distributors could behave differently from insurers with stronger agency or proprietary channels.
• Insurance growth after commission cuts: Lower expenses help only if insurers can maintain enough premium growth. A sharp slowdown in new business could offset part of the margin benefit.
• Bancassurance income for banks: Investors should track how much fee income each bank earns from insurance distribution rather than treating the banking sector as one group.
• Credit-life income for NBFCs: The biggest question is how much loan-linked insurance contributes to fees and whether lenders can replace that income with other financial products.

Author's Take

The market reaction makes sense, but treating the IRDAI proposal as uniformly negative for every financial stock misses the bigger picture.

The companies facing the clearest economic risk are those for which insurance commissions are revenue rather than an expense. That makes insurance distributors and commission-heavy lending models more directly exposed.

For insurers, the outcome is far more nuanced. Lower commissions can reduce acquisition costs and potentially improve margins, but only if insurers can continue attracting customers when their distributors are being paid less.

So the most important dividing line may not be insurer versus bank versus NBFC. It may be who owns the customer relationship.

Companies that can generate insurance demand through their own brand, digital platform, agency force or captive customer base should have more flexibility. Businesses that need to pay heavily for every policy sold could face a much bigger adjustment.

And because these are still draft rules, the sharp stock moves seen on September 24 are effectively the market trying to price a regulation whose final shape is not yet known. The next major trigger will therefore be whether IRDAI retains the proposed commission limits after industry feedback or significantly modifies them before implementation.