Zerodha founder and CEO Nithin Kamath has renewed his warning that regulatory risk remains the biggest threat for any regulated financial business after the Insurance Regulatory and Development Authority of India (IRDAI) proposed sweeping changes to insurance commission rules.
On Wednesday, IRDAI issued a consultation paper on ‘Recalibrating Economics of Insurance Distribution,’ setting out a comprehensive framework of reforms covering insurance distribution, its structure, expenses, commissions, market conduct, transparency, and leveraging digital infrastructure.
The consultation paper proposes different commission limits based on insurance type, product, and distributor, with tied agents allowed higher commissions than other distribution entities.
Alongside the commission caps, IRDAI has proposed a phased reduction in expense-of-management (EoM) limits. For life insurers, the limit would fall to 15% of gross direct premium income within two years and 12.5% within five years. For general insurers, it would decline to 25% within two years and 20% within five years.
The proposals could particularly affect the NBFC credit-life distribution model. First-year commissions on loan-bundled life cover are proposed at 2-2.5% for distribution entities, compared with effective payouts of about 45% currently, according to the consultation paper.
IRDAI has also proposed prohibiting compulsory bundling of insurance with loans, which could affect policy attachment rates.
Regulatory risk can reshape the economics of fintech businesses
Reacting to the IRDAI draft, Kamath said, “I keep saying this: for any regulated business, the biggest risk is regulatory risk.”
He added, “Today’s IRDAI draft on insurance commissions is a good reminder.”
Drawing a parallel with the broking industry, Kamath said, “Broking is no different. A change in rules around retail F&O trading, how brokers can earn on client float, MTF requirements, or any of several other areas can change the economics of the business almost overnight.”
He further explained the implications for investors, saying, “So when valuing regulated businesses, you can’t just extrapolate current revenues and profits into the future. One regulation change can alter the economics and the stock price along with it.”
Concluding his point on the broader fintech sector, Kamath said, “Pretty much everything in fintech comes with this risk.”
Insurance, fintech stocks slide
Shares of Max Financial Services tanked 9.81%, while HDFC Life Insurance Company plunged 6.13% on the BSE. The New India Assurance Company fell 5.36%, Niva Bupa Health Insurance Company declined 4.98%, Medi Assist Healthcare Services dropped 4.79%, and ICICI Prudential Life Insurance Company slipped 4.23%.
The BSE Insurance index fell 2.20% to end at 1,481.96.
Among fintech firms, shares of PB Fintech crashed 35.98%, while Turtlemint Fintech Solutions tumbled 20%.
Hariselvan Radhakrishnan, Founder & CEO of HST Wealth, said, “The domestic decline was amplified by the IRDAI consultation paper proposing tighter limits on insurance commissions, distribution expenses and loan-linked insurance practices.”
He added, “The potential pressure on bancassurance fees triggered heavy selling across insurers, distribution platforms and exposed banks and NBFCs, pushing Bank Nifty below 56,000 and extending the damage to the broader benchmarks.”
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