Max Financial, ICICI Pru Life, HDFC Life, SBI Life shares tumble up to 10%; here's why

Life insurance stocks took a beating in Thursday's trade, falling up to 10 per cent, after insurance regulator, IRDAI, released its much awaited commissions, Expenses of Management (EoM), and distribution reform consultation paper that radically cuts commissions payout across products and has the potential to redefine the insurance manufacturer and distributor business model by even completely destroying some business models.

Max Financial Services Ltd fell 10 per cent to Rs 1,400.05. ICICI Prudential Life Insurance Company Ltd fell 7.62 per cent to hit a low of Rs 448. HDFC Life Insurance Company Ltd declined 6.75 per cent to Rs 524.15. SBI Life Insurance Company Ltd was quoting 1.86 per cent lower at Rs 1,724.35. Life Insurance Corporation of India was flat at Rs 407.40. Star Health and Allied Insurance Company Ltd was quoting at Rs 536.50, down 2.33 per cent/

The intent behind the proposed reform could be noble, to address the root cause behind mis-selling and also to make insurance more affordable. "However, the drastic cut in distribution commission would also make insurance distribution an unviable business and an unattractive vocation. And this could severely backfire, hurting the regulator’s growth agenda and 'Insurance for All by 2047'," Emkay Global said.

LIC & SBI Life are relatively better placed due to lower costs and higher agency and ULIP mix, said Bernstein.

Why insurance stocks fell today
The consultation paper proposed some EOM in life insurance to be 15 per cent of GDPI in two years and 12.5 per cent in five years, and 20 per centr of GDPI in five years in case of general insurance, including SAHI, from existing 30 per cent.

Besides, it proposed drastic cut in first-year commissions across Life savings, and term, Health, and Motor.

Also, prohibition of mandatory bundling of insurance products with loan products and single premium credit life commissions capped is proposed to be capped at 2 per cent.

IRDAI's consultation paper proposed commissions on health renewals and porting cut drastically to 5 per cent in case of distribution entities and 10 per cent in case of agents.

Impact on life insurers
EMkay Global said ULIP products, agency distribution, and lower-cost banca distribution models are less affected as they see less impact.

"In this backdrop, SBI Life, LIC, and Star Health will be among the less-impacted, while HDFC Bank, Max Financial, and ICICI Prudential Life Insurance Co Ltd will have to get their distribution economics right to comply with the proposed commission and EOM structure. We shall review our estimates and ratings once we get more clarity on the impact of these proposals," it said.