Insurance commission: NBFCs seek 5-year transition period to reduce selling fee

NBFCs Seek Relief on Insurance Commission Caps

The representative body for non-banking financial companies has approached the Insurance Regulatory and Development Authority of India with concerns over proposed limits on commissions earned from credit-linked insurance products. The industry association has conveyed to the regulator that the suggested ceilings—2% for credit life insurance and 5% for credit health insurance—would render the distribution of such products commercially unworkable. According to the body, the cost of distributing these policies stands at roughly 32% of the premium collected, a figure substantially higher than the caps under consideration.

Why the Caps Matter for Lenders

Credit-linked insurance is typically sold alongside loans, with NBFCs acting as corporate agents or distribution partners for insurers. The commission earned on these sales forms part of the revenue model for many lending institutions, particularly those serving borrowers in semi-urban and rural markets where penetration of standalone insurance remains limited. If the proposed caps take effect without modification, the gap between distribution costs and permitted commissions could push NBFCs to either absorb losses on this vertical or withdraw from distributing such products altogether. That, in turn, could reduce insurance coverage among borrowers who currently obtain protection at the point of borrowing.

The Request for a Transition Window

The industry body has asked for a five-year transition period to adjust to the reduced commission structure, rather than implementing the caps immediately. Such a phase-in would allow NBFCs to renegotiate arrangements with insurers, restructure distribution models and explore alternative revenue streams. The request reflects a broader tension between the regulator's objective of curbing mis-selling and excessive intermediation charges, and the operational realities of institutions that rely on insurance distribution as a viable busi…