The Insurance Regulatory and Development Authority of India (IRDAI) has proposed tighter limits on insurance commissions and a phased reduction in insurers’ expenses, while seeking to overhaul the distribution architecture to curb high acquisition costs and improve policyholder value.
In a consultation paper floated on Wednesday, the regulator proposed bringing down insurers’ Expenses of Management (EoM) to 12.5% of premium for life insurers and 20% of gross direct premium income (GDPI) for general insurers over five years. The proposed glide path would bring life insurers’ EoM to 15% in two years and 12.5% in five years, while general insurers would move to 25% and 20%, respectively. EoM includes operating expenses of insurance business including commission, remuneration/brokerage, rewards to the insurance agents, intermediaries and insurance intermediaries.
IRDAI said the existing EoM framework introduced in 2023 has not delivered the intended reduction in distribution costs. It noted that total expenses for private life insurers rose to 20.2% of gross premium in FY26 from 16.5% in FY21, while the ratio for general insurers increased to 32.1% from around 25% in FY19.
The regulator also proposed a return to hard caps on commissions, arguing that commission payouts have increased significantly since the removal of caps in 2023. The proposed framework would link commissions to the complexity of products and effort required to sell them, while considering all payments to distributors to prevent circumvention of the limits.
The paper said distributor remuneration in the life insurance corporate agency channel grew 125% between FY23 and FY25, compared with a 28% rise in new business premium. Distributor remuneration now accounts for nearly 27% of first-year premium, with rewards and incentives adding another 30-60% over base commission.
IRDAI has proposed simplifying the distribution architecture by replacing the multiple existing categories with three broad types — insurance distribution entities, distribution persons and market infrastructure institutions. It also wants to ease entry and capital requirements for distributors and allow intermediaries to undertake non-insurance financial and non-financial distribution activities.
The regulator has proposed stronger safeguards against mis-selling, including a ban on compulsory bundling of insurance with loans and credit, except where an acceptable package serves policyholders’ interests. It has also proposed prohibiting volume-linked or reward-linked incentives for bank and NBFC staff selling insurance. Mis-selling could trigger commission claw-backs, while the identity and conduct record of sales personnel could be made available through the proposed Public Insurance Registry.
Motor insurance is another area targeted for reform. IRDAI said average commission rates in the segment were 24%. OEM brokers and Motor Insurance Service Providers accounted for 30% of motor insurance distribution and received nearly Rs 7,050 crore in commissions on Rs 29,000 crore of premium in FY25.
