More consumer-friendly insurance? Regulator targets costs, misselling | Personal Finance

Lower expense limits, stricter commission caps, stronger misselling safeguards and greater transparency are at the heart of the Insurance Regulatory and Development Authority of India’s (Irdai’s) proposed overhaul of insurance distribution.

 

The regulator’s consultation paper, “Recalibrating Economics of Insurance Distribution”, seeks to change how insurers and distributors are paid, how insurance products are sold and how distribution costs are controlled. The broader objective is to move the sector towards a model where insurance is not just “sold” but is also “purchased” by consumers, according to the paper.

 

The proposals come at a time when distribution costs and commissions have been rising sharply. Business Standard reported on Thursday that Irdai’s paper has triggered a sharp reaction among insurance distributors and investors, with PB Fintech’s shares falling 36 per cent and Turtlemint’s declining 20 per cent on September 24. Analysts said the proposed commission changes could materially affect health, term and motor insurance distribution.

  

This makes the draft more than a change in commission rates. It is an attempt by the regulator to reshape how insurance is distributed, with a greater emphasis on affordability, suitability and transparency.

 

What has Irdai proposed?

The proposed framework covers four areas: Expenses, commissions, distribution architecture and customer protection.

 

1. Lower limits on insurers’ expenses 

Irdai has proposed a phased reduction in Expenses of Management (EoM) limits.

 

For life insurers, the proposed EoM limit is 15 per cent within two years and 12.5 per cent within five years. For general insurers, the proposed limit is 25 per cent within two years and 20 per cent within five years.

 

Irdai’s rationale is that lower expenses should help reduce the overall cost of insurance, expand the risk pool in general insurance and improve returns for policyholders in life insurance savings products.

 

The regulator’s data shows that the private life insurance sector’s total expense ratio, after falling from 21.3 per cent in FY15 to 16.5 per cent in FY21, had risen to 20.2 per cent by FY26. For general insurers, it had increased to 32.1 per cent in FY26 from around 25 per cent in FY19.

 

2. New product- and channel-wise commission caps

 

The draft proposes hard commission limits based on the line of business, distribution channel, product complexity and effort involved in selling and servicing the policy.

 

For example, for individual health insurance, the proposed first-year commission limit is 15 per cent for insurance distribution entities and 20 per cent for agents and associates. Different limits have been proposed for motor, marine, property and other general insurance products.

 

Irdai said recalibration is necessary because commission growth has outpaced premium and operating expenses in recent years. In private life insurance, average commission was 9 per cent of total premium in FY26, with significant variation among insurers. Private general insurers reported average commissions of more than 20 per cent.

 

Business Standard reported that analysts expect the proposed caps to result in sizeable reductions in commissions for some new life, health and motor insurance products. The impact could be greater for brokers, banks, shadow banks and other intermediary-led channels than for individual agents.

 

3. More accountability for sellers

 

The proposal also tries to change the way insurance is sold to customers.

 

Irdai wants sellers to assess a customer’s insurance needs, document suitability and offer a product appropriate for the customer rather than one carrying a higher commission. The draft also proposes identifying the individual seller linked to each policy.

 

It has proposed stronger action against misselling, including commission claw-backs in specified cases and restrictions on incentives that encourage unsuitable sales.

 

For banks and NBFCs, the proposal seeks to restrict volume- and reward-linked incentives for employees selling insurance.

 

No forced insurance with loans

Another important consumer-protection measure concerns the bundling of insurance with loans and credit.

 

Irdai has proposed safeguards against compulsory bundling, with insurance not to be forced on a customer unless the arrangement is justified in the customer’s interest. The proposal also seeks greater disclosure of commissions in such arrangements.

 

This is significant because banks and NBFCs could see pressure on insurance fee income if commission caps and restrictions on incentive-linked payouts are implemented. Lenders with multiple insurer tie-ups and incentive-led insurance businesses could face a greater impact.

 

More transparency around commissions

Irdai also wants consumers and the market to have greater visibility into distribution costs.

 

Insurance-related entities with revenue above Rs 50 crore would face public disclosure requirements covering areas such as revenues and expenses, while a cost audit has been proposed for entities above Rs 100 crore.

 

The proposed framework also seeks to bring various forms of remuneration within the definition of commission, reducing the scope for payments to be structured outside the commission framework.

 

Irdai is simultaneously proposing a simpler distribution architecture and greater use of digital infrastructure. Bima Sugam is proposed as a market infrastructure institution, while a Public Insurance Registry is intended to support a more transparent insurance ecosystem.

 

Why the industry is concerned

The regulator’s objective is to reduce distribution costs and address incentives that can contribute to misselling. But the scale of the proposed commission changes has raised concerns about whether some existing distribution models will remain viable.

 

News reports said that industry executives and analysts expect the proposals to put pressure on brokers, bancassurance and corporate agency channels, with some smaller distributors potentially facing consolidation. The proposals could also affect smaller insurers that have relatively high operating costs while building their businesses.

 

Animesh Das, managing director  & chief executive officer, ACKO General Insurance, told Business Standard that the reforms would require insurers and distributors to rethink their distribution models, particularly those dependent on channels such as banks and original equipment manufacturers.

 

Krishnamoorthy Rao, managing director  & chief executive officer, Generali Central Insurance, said intermediaries would need to reassess their cost structures after accounting for lower commissions. He also said lower payouts could make some low-ticket products, such as personal accident and home insurance, less attractive to traditional intermediaries.

 

Analysts have also warned of short-term disruption to insurance volumes. Business Standard reported that Motilal Oswal expects insurers’ profitability metrics to improve over the medium term, but said business growth could face challenges in the shorter term because of disruption across distribution channels.

 

What does this mean for policyholders?

If implemented in its proposed form, the framework would change the incentives surrounding the sale of insurance.

 

For consumers, the intended benefits are lower distribution costs, clearer commission disclosures, stronger suitability requirements and fewer incentives for unsuitable or forced sales. Irdai’s proposal also aims to make the distribution system more transparent and efficient.

 

However, lower commissions could also change how distributors sell low-premium products and which channels they prioritise. That is why the consultation is not simply about cutting costs. It is about deciding how much distributors should earn, what they should be rewarded for and how those incentives affect the customer.

 

The challenge for Irdai will be to ensure that tighter economics improves consumer outcomes without making insurance distribution less accessible, particularly for smaller policies and underserved markets.

 

The proposals are still at the consultation stage. Their final shape could change after feedback from insurers, distributors and other stakeholders.