IRDAI's insurance commission overhaul explained: Will lower payouts make policies cheaper?

Insurance policies could become cheaper if the Insurance Regulatory and Development Authority of India (IRDAI) implements its proposal to cap commissions paid to banks, brokers, and agents. However, the proposed overhaul could also squeeze distributors' earnings and force insurers to rethink their sales strategies. 

In a two-part consultation paper titled 'Recalibrating Economics of Insurance Distribution', the regulator has proposed changes to commission structures, expense management, and insurance distribution. The proposals also seek to promote technology-driven platforms that allow customers to compare and purchase policies directly. 

The proposed reforms come after the government opened the insurance sector to 100% foreign ownership. Despite being the world's 10th-largest insurance market, India's insurance penetration remains below the global average. The proposals are not final, with stakeholders invited to submit feedback by October 25. 

Why does IRDAI want to cap insurance commissions? 

The regulator's move comes amid a sharp rise in distribution expenses relative to premium growth. Life insurers paid ₹60,800 crore in commissions in FY25, an increase of 18% while premium income grew just 6.73%, according to IRDAI data. 

IRDAI now proposes to reintroduce product-wise commission caps, reversing its 2023 decision to remove them. Under the proposed framework, distributors would receive lower commissions for simpler products and higher payouts for complex policies requiring greater advisory support. 

Banks and brokers representing multiple insurers would face lower commission ceilings than agents tied to a single insurer. 

For life insurance, the regulator wants to replace large upfront payouts with commissions spread over the policy's duration. First-year commissions for banks and brokers could range between 5% and 20% of premiums, compared with rates exceeding 40% for several products currently. 

Health insurance commissions could be capped at 15% in the first year and 5% on renewals, against existing payouts exceeding 30% on some products. 

The regulator has also proposed eliminating commissions on compulsory third-party motor insurance for new vehicles and restricting payouts on renewals for older vehicles. To encourage insurance penetration beyond major cities, distributors could receive additional incentives of 10% to 20% for sales in smaller towns and rural areas. 

Will insurance become cheaper for customers? 

Lower commissions could bring down insurance premiums, as distribution expenses are built into policy prices. However, there is no guarantee that insurers will pass on the savings to policyholders rather than retain them to improve profitability. 

The proposals also seek to address misselling, particularly insurance products bundled with bank loans. 

Banks would be prohibited from making insurance purchases mandatory for loan approval. If a bank offers borrowers a lower interest rate for purchasing insurance, it will have to disclose the rates with and without the policy. Customers would also be free to purchase coverage from any insurer. 

The proposed shift towards staggered commissions could discourage distributors from pushing unsuitable policies merely to earn large upfront payouts. Instead, their earnings would depend more on customers continuing their policies. 

Greater use of digital distribution channels could also make it easier for customers to compare products and purchase insurance without relying entirely on intermediaries. 

How will the changes impact banks, brokers, and insurers? 

Banks with substantial income from insurance distribution could face pressure on their fee earnings. Brokers and agents dependent on upfront commissions may also have to overhaul their business models. 

For insurers, the impact could be mixed. While lower commissions would reduce customer acquisition costs and potentially improve margins, weaker financial incentives for distributors could affect new policy sales. 

Life insurers heavily dependent on bancassurance, or insurance sales through banks, could be particularly vulnerable to the proposed changes. The regulator faces the challenge of reducing distribution costs and curbing misselling without discouraging intermediaries from expanding coverage in underserved markets. 

For customers, the biggest question remains whether insurers will translate lower distribution expenses into more affordable premiums.