IRDAI reform ‘may force distributors to completely rethink business model’
While insurance regulator Insurance Regulatory and Development Authority of India (IRDAI) has proposed a major reform in distribution norms by sharply cutting commission payouts across products to bring down distribution costs and benefit customers, the steep cut could make insurance distribution unviable, forcing distributors to completely rethink their business models.
The proposed changes could also have implications for banks. As bancassurance commissions constitute an important source of fee income for many banks, particularly private sector banks, any reduction in commission payouts could therefore affect earnings from this business.
IRDAI, which released its much-awaited public consultation paper on insurance distribution reforms aimed at lowering policy costs and curbing mis-selling, said the purpose of these reforms is to facilitate better and more sustainable outcomes for all stakeholders, specifically policyholders.
The consultation paper proposed expense of management (EoM) for life insurance companies to be 15 per cent of their gross direct premium income (GDPI) in two years and 12.5 per cent in five years, and 20 per cent of GDPI in five years in the case of non-life insurance companies, including standalone health insurance companies (SAHI), from the existing 30 per cent. Moreover, the EoM calculation is being changed to exclude reinsurance inward and consider only a third of crop insurance in gross premiums.
According to industry participants and analysts, the proposals made would reintroduce commission caps across life, health and motor insurance that IRDAI had scrapped in 2023. It has proposed drastic cuts in first-year commissions across life savings and term, health and motor.
Commissions on health renewals and porting have been proposed to be cut drastically to 5 per cent in case of distribution entities and 10 per cent in the case of agents. Commission caps based on distribution lines have been proposed with lower limits for banks/brokers versus agents. While renewal commissions have been linked to persistency in life insurance, higher commissions have been allowed for premiums from smaller tier cities, similar to mutual funds.
Under the proposed rules, banks and non-bank lenders would be barred from compulsorily bundling insurance with loans. Also, single premium credit life commissions are capped at 2 per cent. Significantly, at present, the average effective payouts on single-premium group credit life is around 45 per cent.
Insurance Funds Must Prioritise Claims Over High Acquisition Costs
The Insurance Regulatory and Development Authority of India (IRDAI) is seeking to ensure that a larger share of insurers’ premium income is directed towards settling claims rather than excessive acquisition and business expenses, Chairman Ajay Seth said.
Seth highlighted the rise in life insurance expenses following the introduction of a single expense limit in 2023. According to him, total expenses in the life insurance sector increased from approximately 16% of premium income in FY19 to 22%, indicating the need to improve policyholder value.
The proposed distribution reforms aim to address this trend by encouraging greater competition, simplifying distribution structures and lowering entry barriers. IRDAI has proposed classifying intermediaries into three categories: insurance distribution entities (IDEs), insurance distribution persons and market infrastructure institutions.
The regulator believes that distribution reforms should improve efficiency while ensuring that insurance expenditure delivers better outcomes for policyholders. The proposed changes seek to correct incentives that may encourage insurers to prioritise commission payments over customer interests.
Life Insurance Agents Seek Protection Against Disproportionate Remuneration Cuts
The Life Insurance Agents Federation of India (LIAFI) has urged the Insurance Regulatory and Development Authority of India (IRDAI) to avoid disproportionate reductions in remuneration under its proposed insurance distribution reforms, expressing concern over the potential impact on nearly 15 lakh life insurance agents.
LIAFI Secretary General B. Markandeyulu said the proposed framework should protect existing agents’ legitimate expectations and incorporate appropriate transitional provisions, particularly for existing business. He emphasised that regulatory changes should recognise the services provided by agents and avoid undermining their livelihoods.
The federation highlighted the continuing importance of human agents in rural and semi-urban India, where many customers face difficulties accessing digital platforms to purchase insurance. It also called for fair treatment across individual agents, corporate agents, banks and digital distribution platforms.
LIAFI recommended a comprehensive impact assessment before implementing significant changes to commissions and remuneration. The assessment should examine insurance penetration, policy persistency, employment, rural coverage, agent livelihoods and customer servicing to ensure that cost reduction does not weaken insurance accessibility.
IRDAI May Adopt Cautious Approach to Distribution Fee Reforms
The Insurance Regulatory and Development Authority of India (IRDAI) may adopt a cautious approach to its proposed insurance distribution reforms as it seeks to build consensus among insurers, intermediaries and banks.
The regulator released its consultation paper on September 23, proposing changes to insurers’ expense limits and commission structures. Industry representatives have raised concerns about the methodology used to calculate distribution costs and the potential impact of tighter requirements on bancassurance and health insurance.
According to industry sources, IRDAI may extend the October 25 deadline for stakeholder feedback, allowing additional time for consultations and potentially delaying implementation.
The regulator is seeking to reduce distribution expenses and improve policyholder outcomes, encouraging industry participants to explore non-financial incentives as an alternative to high commission payouts. However, insurers and intermediaries have called for a commercially viable commission structure.
Bancassurance remains a major point of discussion because commissions contribute significantly to banks’ other income. Banks are assessing the potential earnings impact and are expected to communicate their concerns through the Reserve Bank of India.
IRDAI Eases Dividend Repatriation Rules for Foreign-Owned Insurance Intermediaries
The Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurance intermediaries with majority foreign ownership to repatriate dividends without obtaining prior approval from the regulator, in line with the Sabka Bima Sabki Raksha Act.
The regulator has repealed its earlier circular dated January 3, 2020, which required insurance intermediaries to seek approval before repatriating dividends to foreign investors. The amendment also removes the condition relating to payments to related parties.
According to IRDAI, the amended regulations eliminate the requirement for prior regulatory approval for dividend repatriation by insurance intermediaries in which foreign investors hold a majority stake.
The change is expected to simplify regulatory procedures for foreign-owned insurance intermediaries and provide greater flexibility in managing dividend distributions. It also represents a step towards streamlining the regulatory framework governing insurance intermediaries following legislative changes.
For foreign investors, simplified dividend repatriation procedures can improve operational flexibility when managing investments in India’s insurance distribution market. However, the amendment specifically addresses regulatory approval requirements and does not, by itself, establish that all other applicable legal and compliance obligations have been removed.
Regulatory Headwinds May Cloud Insurance Dealmaking
India’s insurance sector could experience a slowdown in dealmaking as investors reassess valuations and business plans amid uncertainty surrounding proposed changes to commissions and expense-of-management (EoM) limits.
The Insurance Regulatory and Development Authority of India (IRDAI) proposed an overhaul of insurance distribution economics in September, including lower EoM limits and product- and channel-specific commission caps. The proposals also envisage separate limits for individual and corporate distributors, with higher caps for individuals to reflect the effort involved in their sales activities.
Industry participants have warned that the proposed changes could constrain near-term growth, reduce distributor revenues and affect employment. Until the final regulatory framework becomes clearer, mergers and acquisitions, initial public offerings, strategic investments and distribution partnerships between insurers and intermediaries could be delayed or reassessed.
The uncertainty comes as foreign insurers explore greater ownership of Indian insurance ventures following the liberalisation of foreign direct investment norms, while new players prepare to enter the market.
Aravind Venugopal, partner at Khaitan & Co., said commission structures are central to insurance pricing and distribution. He added that investors could reassess valuations and transaction timelines until greater regulatory clarity emerges.
Insurers Seek Softer Landing on IRDAI Commission Cuts
Senior executives from life, general and health insurance companies have urged the Insurance Regulatory and Development Authority of India (IRDAI) to adopt a gradual approach to proposed commission reductions and expense-of-management (EoM) reforms.
IRDAI Chairman Ajay Seth held an informal meeting with selected insurance executives in Mumbai to explain the regulator’s proposals and discuss concerns surrounding distribution costs and the industry’s operating environment.
Insurers reportedly sought a phased reduction in commissions, differentiated EoM limits for companies of different sizes and relaxation of norms governing group credit life insurance policies.
Industry representatives acknowledged the need to rationalise distribution expenses but argued that reforms should reflect the actual costs incurred by intermediaries and the services they provide. They called for a transition period, or glide path, for both commission reductions and changes to EoM limits.
Executives cautioned that implementing sharp reductions without adequate transition arrangements could affect industry growth and insurance penetration. General insurers, in particular, expressed concerns about meeting the proposed expense limits.
The discussions indicate that stakeholders support improving distribution efficiency but want the final framework to balance cost control with commercially sustainable distribution models and continued expansion of insurance coverage.
Proposed IRDAI Distribution Norms Could Put Insurance Volumes at Risk
The Insurance Regulatory and Development Authority of India’s (IRDAI) consultation paper, Recalibrating Economics of Insurance Distribution, proposes significant changes to commission structures and expense limits, raising concerns about distributor profitability and insurance sales volumes.
The draft proposes commission caps substantially below existing payouts in several categories. Credit life commissions could fall from 28% to 2%, while health insurance commissions could decline from 40% to 5%. For motor insurance, the proposed commission on own-damage policies is 5%, compared with the current 16%, while loan-packaged motor third-party insurance would carry no commission under the proposal.
The paper also proposes restrictions on compulsory insurance bundling with loans and volume-linked incentives for employees selling insurance.
According to the assessment cited in the report, implementation could reduce profit before tax by 1–12% for non-banking financial companies and fintechs distributing insurance. The proposals have also raised concerns about the impact on listed insurance companies and distribution platforms, including PB Fintech.
Some analysts estimate that commissions could decline by 70–90% in certain high-margin categories. Such reductions could place pressure on distributor economics, potentially affecting incentives to sell policies and overall insurance volumes.
