What are IRDAI’s proposed insurance reforms, why have they hit insurance stocks?

India's insurance regulator, IRDAI, has proposed reforms to the insurance sector, including changes to distribution, structure, expenses, and commissions. These proposed changes have led to a decline in insurance stocks, with Policybazaar's stock falling by 36% on Thursday and dropping by another 3% on Friday. Other insurance distributors, such as TurtleMint and Max Financial Services, also saw significant stock declines.

The reforms aim to improve consumer protection, reduce mis-selling, and address dark patterns in the industry. The regulator wants the first-year commission for distributors in life insurance to be capped at 20% of the premium and 25% for agents, which is half of the current commission rates. These caps are expected to negatively impact online aggregators like Policybazaar and TurtleMint, which have high customer acquisition costs and rely heavily on upfront commissions.

IRDAI's proposal to limit expenses of management (EoM) to 12.5% and 20% of gross direct premium income for life and general insurers, respectively, in a five-year period could also affect insurance companies' profitability. The reforms come as India's insurance penetration is low, at 3.7% in 2024-25, and the government has recently raised the Foreign Direct Investment (FDI) limit to 100% for the insurance sector.