PB Fintech, Turtlemint crash 20% as IRDAI proposes new rules for insurance distributors

Shares of insurance companies and insurance distribution platforms, including HDFC Life, SBI Life, ICICI Prudential Life, LIC, Max Financial Services, PB Fintech and Turtlemint Fintech Solutions, were in focus on Thursday, September 24, after IRDAI proposed changes aimed at curbing dark patterns and rationalising insurance distribution costs.

This is because the Insurance Regulatory and Development Authority of India (IRDAI) has proposed a wide-ranging overhaul of insurance distribution, including curbs on ‘dark patterns’, lower expense limits and changes to commission structures.

IRDAI has 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 insurance regulator proposes to replace the existing complex and fragmented architecture with three broad categories of distribution entities: Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs).

The Expense of Management (EoM) framework is proposed to be recalibrated through lower limits with a phased glide path, the paper said.

How stocks were performing in early trade

PB Fintech shares were locked in a 20% lower circuit limit of ₹1,508.90 apiece on the NSE, while Turtlemint Fintech Solutions was down 20% at ₹109.04.

Turtlemint Fintech shares fell sharply after the proposed changes to insurance distribution costs and curbs on certain digital sales practices, including “dark patterns”.

The proposals could put pressure on commissions and earnings of insurance distributors such as Turtlemint, prompting investors to reassess the company’s revenue and profit outlook.

HDFC Life Insurance Company shares were down over 7.2% at ₹520.95 apiece on the NSE, while SBI Life Insurance Company was down over 1% at ₹1,745.20.

Life Insurance Corporation of India (LIC), on the other hand, was in the green. It was up 1.45% at ₹413.40 on the NSE.

Here are the details

For life insurers, the EoM limit would move to a company-level basis linked to Gross Direct Premium Income (GDPI), with the limit proposed at 15 within two years and 12.5 within five years.

For general insurers, the basis would shift from gross written premium (GWP) to domestic GDPI, with the EoM limit reducing from 30% of GWP to 20% of GDPI within five years, also through progressive annual reductions.

"The proposed reduction in EoM is intended to lower the overall cost of insurance, thereby expanding the risk pool available in general insurance and enhancing returns to policyholders in life savings products," said the paper. IRDAI has invited comments till October 25.

The consultation paper proposes tracking dark patterns and making relevant performance information available to strengthen market discipline.

Product, pricing and quality disclosure should be made by all insurers in a standard and easy-to-understand form without seeking personal details, it said.

Currently, product features and pricing details can be accessed by the public only after providing personal details.

"That is one of the 'dark patterns' often seen on the websites of most insurers and distributors. That is also against the guidelines issued by the Central Consumer Protection Authority under the Consumer Protection Act, 2019," Irdai said, as it proposed to prohibit 'dark patterns' under the insurance regulations.

What are dark patterns?

Dark patterns refer to deceptive website or app designs that can mislead or manipulate users into taking actions they did not originally intend to take.

The commission framework is proposed to be recalibrated in parallel, the paper said.

Instead of a uniform approach, commission limits would take into account the segment, line of business, distribution channel, product complexity and the effort involved in selling and servicing the product.

"Insurers and large distribution entities would be required to disclose commission policies and structures in a simple and accessible manner, while specified commercial policies would carry commission disclosures," it said.

IRDAI also proposed stronger safeguards against mis-selling, including making suitability an enforceable obligation, documenting customer needs and suitability for specified life insurance sales, and maintaining an audit trail.

What Bernstein said

The research firm said that the proposed commission cuts are far more severe than expected, with PB fintech likely to be the most impacted.

Proposed take-rate caps could materially pressure PB fintech’s unit economics, particularly in health and motor insurance.

Here, take-rate means the percentage of the insurance premium that a platform like Policybazaar can effectively earn as commission/distribution income for selling an insurance policy.

Take-rate cap means if regulators put a maximum limit on how much commission/distribution income can be earned on a policy.

Health and motor insurance are important parts of the online insurance-distribution business, and if the proposed limits reduce the amount distributors can earn on these products, the impact on the economics of selling those policies could be more noticeable.

So, if regulators limit the commission PB fintech can earn on each health or motor insurance policy, its revenue and potentially profit per policy could fall, while many of its costs remain relatively unchanged.

Other key points

Bernstein added that insurers could also see some drag on health and term growth.

LIC and SBI Life are relatively better placed due to lower costs and a higher agency/ULIP mix.

Lower distribution costs could eventually be passed on to customers, supporting some volume growth.

Bernstein expects significant industry pushback against the proposals, while near-term stock movements could reflect pressure on PB fintech from larger-than-expected commission cuts.