Mumbai: The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a significant reset of insurance distribution economics, seeking to bring down insurers’ expenses and introduce clearer limits on commissions paid to agents and intermediaries.

The regulator’s consultation paper, “Recalibrating Economics of Insurance Distribution”, released on September 23, proposes a five-year glide path for reducing Expenses of Management (EoM), along with product-, channel- and effort-based commission limits. The proposals are aimed at making insurance distribution more cost-efficient, improving transparency and strengthening policyholder protection.

The consultation comes after IRDAI’s 2023 reforms removed most product-level commission caps and gave insurers greater flexibility to determine remuneration within their overall EoM limits. The regulator’s latest proposals seek to recalibrate that flexibility rather than simply return to the earlier regulatory framework.

From product-wise limits to a flexible EoM framework

Before the 2023 reforms, IRDAI regulated insurers’ expenses through separate limits for commissions and overall management expenses. Commission caps were prescribed for individual products, while EoM ceilings were separately specified for different lines of insurance.

The 2023 framework removed most product-wise commission sub-limits and combined remuneration and rewards within the broader definition of commission. General insurers were given a 30 per cent EoM ceiling based on premium, while standalone health insurers had a 35 per cent ceiling. Life insurers continued to operate under segment-level EoM limits, even though product-level commission restrictions were removed.

The 2024 regulations subsequently consolidated the EoM and commission framework.

The expectation was that insurers would use the additional flexibility to allocate distribution costs more efficiently and compete through better products and wider insurance penetration. However, IRDAI’s latest consultation indicates that distribution economics have continued to require regulatory attention. The regulator has highlighted rising costs and significant differences in commission payouts across products and distribution channels.

New EoM limits proposed for insurers

One of the biggest changes proposed by IRDAI is the way insurers’ expenses are measured.

At present, general insurers’ EoM is linked to gross written premium (GWP). The consultation proposes shifting the benchmark to gross direct premium income written in India (GDPI). This would remove the effect of inward reinsurance from the premium base used for calculating the expense ratio.

For general insurers, the proposed EoM ceiling would gradually fall from the existing 30 per cent framework to 25 per cent within two years and 20 per cent within five years.

For life insurers, IRDAI has proposed moving towards a company-level EoM limit rather than continuing with separate segment-based limits. The target is 15 per cent within two years and 12.5 per cent within five years. Life insurers that are already below the proposed benchmark would face a separate longer-term target of 10 per cent, according to the consultation proposals reported by Business Standard.

The proposed framework would also bring various expense-related carve-outs within the overall EoM structure rather than allowing separate treatment for selected categories.

Commission caps to return across products

The more visible change for distributors is the proposed reintroduction of commission limits.

Rather than applying a broad uniform approach, IRDAI wants commission limits to reflect the type of product, distribution channel, complexity of the product and effort required to sell and service it. The regulator has also proposed differentiated treatment for agents and open-architecture distribution entities.

The consultation proposes lower payouts for products that require relatively limited selling effort, while allowing higher commissions where acquisition and servicing require greater effort.

For example, compulsory third-party motor insurance, where the scope for product selection and selling effort is relatively limited, would see very low or nil commission in certain institutional distribution channels under the proposed framework. Health and life insurance would also have differentiated commission structures based on whether the policy is new or a renewal and other characteristics.

For life insurance, the proposed first-year commission for certain individual policies with a premium payment term of 10 years or more could reach 20 per cent for distribution entities and 25 per cent for agents. Additional commission allowances have also been proposed for policies sold in smaller towns and rural areas, where insurance penetration remains comparatively low.

The structure is intended to recognise the greater effort involved in acquiring a new customer while reducing incentives for distributors to repeatedly chase existing customers simply for renewal-linked payouts.

Greater scrutiny of distributor payments

IRDAI also wants the definition of distribution-related payments to become broader and more transparent.

The consultation proposes bringing cash and non-cash incentives, rewards and other forms of distributor support into the regulatory framework. Insurers and large distribution entities would be expected to disclose their commission policies and structures in simple language.

The regulator has also proposed mandatory cost audits covering insurers’ expenses, including intermediary payouts and non-monetary incentives. Insurance distribution entities above specified revenue thresholds would also come under cost-audit requirements.

These measures are designed to make it harder for distribution costs to move outside the visible commission line through incentives, promotional payments or other arrangements.

Mis-selling and loan-linked insurance under scrutiny

The proposed commission reforms are part of a wider attempt to address mis-selling.

IRDAI has proposed stronger accountability for the person responsible for selling a policy, including linking an individual’s identity with the policy sold. It has also proposed making information about certain mis-selling incidents available publicly and allowing commission clawbacks in cases where mis-selling is established.

The regulator has separately proposed restrictions on compulsory bundling of insurance with loans or credit. Acceptable combinations could continue, but the proposed framework would require greater transparency and safeguards around the customer’s choice of insurer and payment arrangements.

IRDAI has also proposed action against certain digital “dark patterns” on insurance websites, including practices that require customers to submit personal information merely to view product features or pricing. The aim is to make product and price information available in a clearer and more accessible manner.

New distribution architecture and Bima Sugam

The consultation paper also proposes simplifying India’s fragmented insurance intermediary structure.

IRDAI has suggested three broad categories: Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs). The proposed architecture is intended to reduce fragmentation while allowing distributors to diversify their businesses into certain non-insurance financial and non-financial services.

Market Infrastructure Institutions would provide digital, pull-based alternatives to conventional insurance selling. Bima Sugam is identified as one such digital infrastructure initiative, while a proposed Public Insurance Registry would provide another layer of digital public infrastructure.

Industry seeks a gradual transition

The proposals have already triggered discussions among insurers and distributors. At a meeting with senior insurance executives in Mumbai over the weekend, IRDAI Chairman Ajay Seth heard industry requests for a more gradual reduction in commissions, differentiated EoM limits and changes to certain group credit-life provisions.

Industry participants have also raised concerns that sharp reductions in commissions could affect some distribution channels, particularly bancassurance and broking, while putting additional pressure on smaller insurers that are still building scale. Business Standard reported that analysts and industry executives expect the proposed changes to potentially lead to consolidation among distributors and short-term pressure on insurance volumes.

However, the proposals remain subject to consultation and are not yet final regulations. IRDAI has invited comments from insurers, distributors, policyholders and other stakeholders until October 25, 2026.

What the proposals could mean for policyholders

If implemented in their proposed form, the reforms would change the economics of insurance distribution by placing greater emphasis on the cost of acquiring and servicing a policy rather than simply rewarding premium generation.

For policyholders, the intended outcome is greater transparency around what products cost, who is being paid to sell them and how incentives influence distribution. Lower EoM limits could also create scope for insurers to reduce embedded costs, improve pricing or retain more of the premium for underwriting and policyholder benefits.

For insurers and distributors, however, the transition could require substantial changes to commission structures, sales incentives and operating models.

The consultation therefore represents a significant course correction from the flexibility introduced in 2023. Rather than returning wholesale to the older system of rigid product-level controls, IRDAI is proposing a more calibrated framework in which expenses, commissions and distribution incentives are linked more closely to the product, channel, effort and customer outcome.

The final rules will depend on stakeholder feedback and IRDAI’s subsequent decisions. Until then, the proposed commission caps and EoM targets should be viewed as regulatory proposals rather than final requirements.