New Delhi: Insurance stocks came under sharp selling pressure Thursday after the Insurance Regulatory and Development Authority of India (IRDAI), a statutory body under the Finance Ministry, proposed a major overhaul of insurance distribution, including lower expense limits and tighter caps on commissions.
The market reaction came after IRDAI released its public consultation paper, “Recalibrating Economics of Insurance Distribution”.
IRDAI says the current system has increasingly rewarded the acquisition of new business rather than customer retention, service and claims outcomes.
In the general insurance category, premium sourced through brokers increased 37 percent between FY23 and FY25, but commissions grew 173 percent, it said, adding that the average commission rates increased from 8.5 percent to 17 percent.
During the same period, motor insurance commissions nearly tripled from around 9 percent to 25 percent, while commissions on retail health plans rose from around 10 percent to 30 percent.
In the life insurance category, distributor remuneration increased 125 percent between FY23 and FY25, compared with 28 percent growth in new business premium. The paper describes this trend as: “Remuneration is growing four to five times faster than the business it is paid on.”
The paper cites motor insurance as a key example, where the average commissions are around 24 percent, with rates ranging from 13 percent to 50 percent. OEM (Original Equipment Manufacturer) brokers and motor insurance service providers account for 30 percent of the market and received nearly Rs 7,050 crores in commissions on Rs 29,000 crores of premium in FY25. The premium on motor insurance grew around 34 percent between FY23 and FY25, while commissions rose around 259 percent.
The regulator also points to policies not being retained for the long term and rising customer complaints.
In the life insurance category, only 48 percent of policies were still in force 61 months after purchase, compared with 71 percent of policies sold through the online channel. In general insurance, grievances grew from 78,347 in FY23 to 1,37,361 in FY25, with nearly 69 percent of Bima Bharosa (grievance redressal portal managed by IRDAI) complaints linked to claims.
IRDAI’s paper is a public consultation, not a final regulatory framework. The regulator has invited comments from policyholders, insurers, distributors and other stakeholders until 25 October 2026.
Insurers will have to bring down overall expenses
One of the biggest changes proposed is a phased reduction in Expenses of Management (EoM), which are the overall expenses an insurer incurs to run its business, including distributor commissions and other operating costs.
In simple terms, the IRDAI has suggested that insurers spend a smaller share of the premium they collect on these expenses. It says the aim is to reduce costs and expand the risk pool, while improving outcomes for policyholders.
For life insurers, IRDAI proposes bringing EoM down to 15 percent of premium within two years and 12.5 percent within five years. Insurers that were already below the proposed benchmark in FY25 would have to bring EoM down to 10 percent within five years if this suggestion makes it to the final framework.
For general insurers, the proposed limits are 25 percent within two years and 20 percent within five years, with FY2027-28 to be treated as Year 1 of the proposed glide path.
IRDAI also proposes changing how EoM is calculated for general insurers. Instead of using Gross Written Premium (GWP), it recommends that EoM be calculated against Gross Direct Premium Income (GDPI), excluding inward reinsurance.
Gross Direct Premium Income is the total premium an insurer collects directly from policyholders in India, before deductions. Gross Written Premium is broader and includes GDPI plus premiums from inward reinsurance.
The regulator has also proposed mandatory cost audits of insurers covering all expenses, including payouts and non-monetary incentives to intermediaries. It has also proposed that, under a new framework, large insurance distribution entities would face cost audits.
Commission caps may return, but vary by product
IRDAI proposes bringing back hard limits on distributor commissions, with different caps depending on the product, distribution channel and effort required to sell the policy.
The proposed maximum commission on new vehicle third-party motor insurance is nil for distribution entities, and 2.5 percent for agents and associates. For individual health insurance sold for the first time, the proposed limits are 15 percent for distribution entities, and 20 percent for agents and associates.
The regulator proposes lower commissions on renewals, single-premium products and products where customers already have high awareness. For life insurance policies, the commissions should reward distributors for keeping policies active over several years, rather than mainly for getting the first-year premium.
IRDAI also proposes treating all payments to distributors as commissions, including incentives, awards, reimbursements, gifts and other non-cash benefits.
Distribution, customer safeguards will also change
IRDAI says the existing distribution system is fragmented, with several types of entities and individual sellers operating under different rules.
The paper proposes a simpler framework built around three broad categories: Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs).
Existing corporate agents, brokers, web aggregators and other distribution entities would come under IDEs, while agents, point-of-sale persons and other individual sellers would come under IDPs. MIIs would be not-for-profit companies promoted by groups of insurers.
The proposed structure is intended to make entry easier, allow distributors to offer more products and services and create greater competition.
The proposals also seek to stop compulsory bundling of insurance with loans or credit. Banks and non-banking financial companies registered as insurance distribution entities would not be allowed to force customers to buy insurance with a loan.
The packaging of a loan could still be allowed where it provides a specific benefit, but customers would have to be shown loan terms with and without insurance, and remain free to buy the policy elsewhere.
IRDAI has also proposed stronger safeguards against mis-selling, including tagging the salesperson’s identity to policies sold and making information on mis-selling incidents available through the proposed Public Insurance Registry. Mis-selling could also lead to commission claw-backs.
(Edited by Amrtansh Arora)