Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
CS Parth Chourikar
Associate - Research and Advisory, Taxmann
Who Really Pays for Insurance?
IRDAI’s Proposed Reset of Distribution Economics
CS Parth Chourikar
Associate - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
The Cost Problem Behind the Proposed Reforms
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3.
What IRDAI is proposing?
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4.
Conclusion: A recalibration of the economics, not merely a revision of the rules
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1. Introduction The insurance industry can grow in two ways: by selling more to customers it already reaches, or by bringing millions of uninsured and underserved customers into the insurance net. IRDAI’s September 2026 consultation paper, ‘Recalibrating Economics of Insurance Distribution’, is essentially asking which of these paths India’s insurance market should take. India’s insurance sector has grown in absolute terms, but IRDAI believes this growth has not kept pace with the country’s expanding economy and protection needs. The concern, therefore, is not merely how much premium is being collected, but whether the economics of distribution are helping insurance reach more people, deliver better value and operate more efficiently. This is reflected in one of the paper’s central ideas: moving from a market where ‘insurance is sold’ towards one where ‘insurance is also purchased’. The shift would give customers greater ability to compare products, understand price and quality, choose insurers and increasingly purchase insurance digitally and directly. The need for such a shift becomes clearer when the distribution of insurance is examined. Individual life insurance policy numbers have remained broadly stagnant over the last decade, while market concentration remains significant, with the two largest life insurers accounting for around 65% of the market and the top ten general insurers around 68%. Retail health insurance is similarly concentrated, with around 80%-82% of policies located in just ten states. In life insurance, around 66%-70% of retail new business is concentrated in ten states. At the same time, informal workers, MSMEs, homeowners and businesses continue to represent significant underserved segments. The message is therefore simple: growing premiums is not enough. The real challenge is to widen the insurance pool. And that brings the economics of distribution, commissions, expenses, incentives and the role of intermediaries, to the centre of IRDAI’s proposed reforms.
2. The Cost Problem Behind the Proposed Reforms The IRDAI identifies significant differences in Cost of Doing Business (CoDB) across insurers. Among life insurers other than the two largest, CoDB is around 22%, with individual insurers ranging from 18% to 39%. The two largest insurers operate at around 10%–12%. In general insurance, CoDB for other insurers is around 29%, with individual insurers ranging from 20% to 48%, compared with around 18% for the largest insurer. The concern is that elevated distribution and intermediary-related costs can reduce the value ultimately available to policyholders. This becomes more significant where distributor remuneration is growing materially faster than the underlying insurance business.
Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
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In a representative sample covering around 92% of premium procured through corporate agents, new business premium increased by 28% between FY23 and FY25, while total distributor remuneration increased by 125%. Remuneration represented around 27% of first-year premium, with additional rewards and incentives adding another 30%–60% over base commission in some cases. The same divergence is visible in other channels. Between FY23 and FY25, premium sourced through general insurance brokers increased by 37%, while commissions increased by 173%, taking average commission rates from 8.5% to 17%. Motor insurance commissions rose from around 9% to 25%, while retail health commissions increased from around 10% to 30%. The concern is therefore not simply how much distributors earn, but what the remuneration structure rewards. IRDAI wants to reduce the emphasis on acquisition alone and give greater weight to persistency, suitability, servicing and long-term customer value.
3. What IRDAI is proposing? The consultation paper proposes a set of interlinked measures rather than a single commission cut. The proposals can broadly be understood under the following themes.
3.1. Tighter and more targeted expense limits IRDAI proposes a gradual correction to the Expenses of Management framework rather than abandoning the 2023 model altogether. For life insurance, the proposed glide path would take EoM to 15% of premium within two years and 12.5% within five years, with FY2027–28 as Year 1. Insurers already below the benchmark would move towards 10% over five years as a long-term objective. For general insurance, the proposed levels are 25% within two years and 20% within five years. IRDAI also proposes calculating general insurance EoM using Gross Direct Premium Income rather than Gross Written Premium and tightening the treatment of reinsurance commission and other potential workarounds. The proposal also includes a reduction in IRDAI’s regulatory fee from 0.05% to 0.04% of premium, subject to a maximum of Rs. 20 crore.
3.2. Product- and channel-specific commission caps IRDAI proposes bringing back prescriptive maximum commission limits, but in a differentiated form. Instead of a uniform ceiling, limits would vary according to the product, distribution model, nature of business and selling effort. Open-architecture distributors would generally face lower limits than closed-architecture models. Mandatory or near-mandatory products could attract very low or nil commissions, while products requiring greater selling effort could carry higher limits. Additional incentives are proposed for business sourced from underserved areas.
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Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
Importantly, the definition of commission would be widened to cover commissions, rewards, incentives, reimbursements and non-cash benefits. The objective is to prevent remuneration from escaping the regulatory framework merely because it is described differently.
3.3. A sharper cap on retail health commissions The proposed commission grid puts specific numbers behind the reform. For individual health insurance, distribution entities would be capped at 15% for first-time sales and 5% for renewals and portability. Agents and associates would have limits of 20% and 10%, respectively. The proposal also differentiates between products such as motor, health, property and engineering insurance. For motor third-party insurance on new vehicles, commission would be nil for distribution entities and capped at 2.5% for agents and associates. At the same time, IRDAI proposes an additional 20% of the applicable limit for individual policies sourced from rural areas and towns with populations below 50,000. The objective is therefore not simply to reduce remuneration, but to redirect incentives towards markets where distribution effort is genuinely higher.
3.4. Life insurance commissions linked more closely to policy duration For individual linked and non-linked products, first-year commission for distribution entities would range from 5% for shorter premium payment terms to 20% for terms of ten years or more. For agents, the corresponding limits would range from 6.25% to 25%. Renewal commissions would generally be lower, with scope for higher payouts where policies remain in force for longer periods, subject to an overall ceiling. The underlying shift is from rewarding first-year acquisition towards rewarding persistency and continuing service.
3.5. Mandatory cost audits and stronger accountability IRDAI proposes annual cost audits for all insurers and cost audits for insurance distribution entities with insurance commission income exceeding Rs. 100 crore. It also proposes greater disclosure of commission structures and stronger responsibility on boards and senior management to certify compliance. The aim is to prevent circumvention through related-party payments, outsourcing arrangements, incentives or other forms of indirect remuneration. In other words, commission caps would be supported by a mechanism to establish what was actually paid.
3.6. Greater transparency and easier product comparison IRDAI proposes making standardised information on product pricing, quality and performance more accessible without requiring customers to first disclose personal details. It also proposes standardised one-page product information sheets and FAQs to make comparison easier.
Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
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The broader objective is to make transparency part of market design rather than leaving it to voluntary disclosure. Customers should be able to compare products before entering the sales funnel.
3.7. A more direct customer–insurer relationship The proposal seeks to establish a direct and verified connection between policyholders and insurers through measures such as OTP-based verification, Aadhaar-based authentication and verified customer contact details. The proposed Public Insurance Registry (PIR) would support ‘Know Your Insurer’ and ‘Know Your Distributor’ mechanisms. IRDAI also proposes that premiums move directly from the customer’s account to the insurer and that claim payments be credited directly to verified bank accounts of policyholders or nominees. These measures are intended to reduce fraud, forced bundling and intermediary-related risks.
3.8. Restrictions on compulsory bundling IRDAI proposes prohibiting compulsory bundling of insurance with loans and other financial products offered by lending institutions operating as insurance distribution entities. Voluntary bundling could continue where the customer receives a clear and demonstrable benefit. The customer would need to see the loan rate with and without insurance, remain free to choose the insurer and pay the premium separately. The proposal also seeks to support MSME insurance by removing the existing Rs. 5 crore risk-cover limit for certain loan-linked property insurance arrangements.
3.9. Suitability and individual accountability for mis-selling IRDAI proposes making suitability an enforceable obligation. For life insurance above a prescribed ticket size, insurers could be required to conduct a documented needs and suitability assessment and maintain an audit trail. Where a customer chooses a different product from the one recommended, the reason would also need to be recorded. Customer consent would not by itself absolve the insurer or intermediary from responsibility for an unsuitable sale. The proposed framework specifically addresses practices such as misrepresenting premium structures, failing to explain surrender implications and inadequately explaining ULIP charges and investment risks.
3.10. Incentives, gifts and foreign trips brought within the framework The proposal would bring monetary and non-monetary incentives such as travel incentives, luxury gifts, milestone bonuses and contest rewards within the regulatory framework. Volume- or reward-linked incentives for bank and NBFC personnel selling insurance are also proposed to be prohibited. The PIR could link each policy to the relevant salesperson or distributor, allowing misselling to be tracked and potentially made public. Commission claw-backs could further introduce individual-level accountability.
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Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
3.11. Motor insurance as a test case for the reset Motor insurance receives specific attention because it illustrates the gap between premium growth and distribution remuneration. IRDAI states that average motor insurance commission rates are around 24%, ranging from 13% to 50%. OEM brokers and MISPs account for around 30% of new and old vehicle business and received nearly Rs. 7,050 crore in commissions on approximately Rs. 29,000 crore of premium in FY25. More significantly, motor premium grew by around 34% between FY23 and FY25, while motor commissions grew by around 259%. IRDAI therefore proposes greater use of digital purchasing through platforms such as Bima Sugam, mandatory registration of qualifying motor dealers as insurance distribution entities, disclosure of alternative purchasing options and lower commission limits for mandatory third-party and easy-to-sell newvehicle insurance. Motor dealers would also be expected not to deny cashless repair facilities merely because the customer purchased insurance elsewhere.
3.12. Bima Sugam and Market Infrastructure Institutions IRDAI proposes Market Infrastructure Institutions (MIIs) as digital, neutral and cost-efficient marketplaces for insurance. Bima Sugam is identified as one such platform, with scope for other insurer-promoted MIIs operating on a not-for-profit basis with broad industry participation. The intended shift is from a market where distribution relationships strongly influence sales towards one where insurers compete on pricing, product features, claims performance and service quality.
3.13. Public Insurance Registry as digital infrastructure Alongside customer-facing marketplaces, IRDAI proposes the Public Insurance Registry as a regulator-led Digital Public Infrastructure for insurance. It is envisaged as an interoperable platform through which customers and market participants can verify and access information on insurers, distributors, products and performance. The PIR could support customer verification, portability, digital purchases and marketconduct tracking, while reducing information asymmetry and operational friction.
4. Conclusion: A recalibration of the economics, not merely a revision of the rules The most important aspect of IRDAI’s September 2026 consultation paper is the scale of the proposed reset. The paper recognises that India’s insurance sector cannot solve its protection gap simply by selling more expensive policies to existing customers. Greater penetration will require
Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
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a distribution system capable of reaching new geographies, new customer segments and underserved businesses, while keeping the economics of insurance sustainable. That requires controlling acquisition costs without eliminating legitimate distribution incentives. It requires simplifying the intermediary architecture without weakening accountability. It requires opening opportunities for distributors while strengthening training and suitability obligations. It requires replacing opaque remuneration structures with transparent commission frameworks. It requires using digital infrastructure not merely as another sales channel, but as a mechanism for comparison, verification, accountability and direct customer choice. Most importantly, it requires changing the underlying equation between premium growth and customer value. The consultation paper therefore represents a proposed transition from a system where the economics of distribution can strongly influence what is sold towards one where price, suitability, quality, persistency, service and customer outcomes are intended to play a much greater role in determining how insurance is distributed. IRDAI itself characterises the reforms as a continuation of earlier reforms combined with course correction. It states that four of the ten identified sectoral challenges are targeted directly, while three others are addressed partially, and acknowledges that further reforms will be required to address the broader issue of insurance growth and coverage. The regulator also recognises that implementation will be a multi-year effort requiring sustained accountability and disclosure. In that sense, the most consequential proposal is not any single commission cap or EoM number. It is the broader attempt to change the philosophy of insurance distribution, from ‘insurance is sold’ towards a market where insurance is increasingly understood, compared and purchased by the customer.
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Who Really Pays for Insurance? IRDAI’s Proposed Reset of Distribution Economics
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