An Analytical Case Study of IRDAI’s Proposed Distribution Reforms
India’s insurance industry has spent years debating how to increase penetration, improve customer trust and make distribution economically sustainable. The Insurance Regulatory and Development Authority of India’s recent consultation paper, “Recalibrating Economics of Insurance Distribution,” attempts to address all three issues simultaneously.
Released on 23 September 2026, the paper is not yet a final regulation. It proposes a fundamental redesign of distribution architecture, commissions, insurer expenses, sales conduct and transparency. At its core lies an important question: how much should it cost to distribute insurance, and what should the customer receive in return for that cost?
The debate is therefore much larger than commission reduction. It concerns the economics on which insurers, agents, banks, NBFCs, brokers, digital platforms and other distributors have built their businesses.
Why Has IRDAI Intervened?
The regulator’s concern arises from the growing divergence between premium growth and distribution remuneration.
In a sample covering a substantial portion of life insurance business sourced through corporate agents, new business premium increased from approximately Rs. 63,000 crore in FY2022-23 to Rs. 80,000 crore in FY2024-25, a growth of about 28%. Over the same period, total distributor remuneration, including commissions, rewards and incentives, increased from approximately Rs. 9,580 crore to Rs. 21,600 crore, or about 125%.
A similar pattern emerged in general insurance. Premium routed through brokers increased by around 37%, while commissions rose approximately 173%. IRDAI also noted that rewards, promotional payments, brand fees and other commercial arrangements could raise effective distributor remuneration substantially above the stated base commission.
The regulatory concern is understandable. If distribution costs rise several times faster than the business generated, either the additional expenditure must create demonstrably greater customer value or the economics eventually become difficult to justify.
The Proposed Reset
The consultation paper proposes simplifying the present distribution structure into three broad categories: Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions. Entry barriers for incorporated distributors would also be reduced, while greater open architecture could expand the number of insurers whose products distributors may offer.
More consequential, however, is the proposed return of product- and channel-specific commission ceilings.
For example, for certain life savings products with premium-paying terms of ten years or more, first-year commission is proposed to be capped at 20% for institutional distribution entities and 25% for individual agents, with lower renewal commissions. Single-premium credit-life remuneration could fall to approximately 2-2.5%. Health insurance first-year commissions are proposed at up to 15% for distribution entities and 20% for agents, with lower renewal limits. Certain motor third-party commissions would also face significant restrictions.
Simultaneously, insurers would face a tighter Expense of Management framework. Life insurers are proposed to move towards an EoM ceiling of 15% within two years and 12.5% within five years, while general and health insurers would move towards 25% and eventually 20%.
Taken together, the proposals attack cost at two levels: what insurers can spend overall and what they can pay distributors.
Impact on Individual Agents: Less Upfront Reward, Greater Need for Persistency
Individual agency remains important because insurance is still a product that frequently requires explanation, persuasion and continuing service.
Lower upfront remuneration could create a genuine economic challenge for agents, particularly those serving lower-premium customers or geographically dispersed populations. Selling a Rs. 20,000 annual-premium policy can require several meetings, documentation, medical coordination and subsequent servicing. The distributor’s effort does not necessarily decline proportionately with premium size.
There is therefore a risk that excessive compression of first-year remuneration could make smaller policies commercially unattractive.
However, the reform could also encourage a healthier shift from acquisition economics towards relationship economics. If remuneration increasingly rewards renewal, persistency and servicing, agents would have a stronger economic incentive to remain engaged after the policy is issued.
The long-term objective should not be to make agents cheaper. It should be to make distribution more productive and more accountable.
Bancassurance: Possibly the Most Significant Disruption
Banks have enormous distribution advantages: existing customers, financial data, branch networks, digital access and frequent customer interaction.
Those advantages also give them negotiating power over insurers.
The proposed framework could materially alter bancassurance economics because institutional distributors would face lower commission limits and greater restrictions on incentives. The effect may be particularly significant where insurance fee income forms a meaningful part of a bank’s non-interest income.
The regulator is also targeting loan-linked insurance. Compulsory insurance bundling with loans would be restricted, financing insurance premiums through loan proceeds would be constrained, and volume-linked incentives, trips, gifts and similar rewards to bank and NBFC sales personnel would face tighter controls.
This could change the economics of credit-life distribution dramatically.
Yet there is an important customer-protection dimension. A borrower should purchase insurance because it provides appropriate protection, not because the customer believes that accepting the insurer suggested by the lender is necessary for obtaining the loan.
Bancassurance may therefore move from captive selling towards demonstrable advice and choice.
NBFCs: The Credit-Linked Model Faces Recalibration
NBFCs could experience an even sharper impact in some segments.
Credit-life, motor and health products are frequently distributed alongside lending transactions. If commissions on credit-linked products decline sharply and mandatory bundling is curtailed, attachment rates could fall.
This does not necessarily mean that credit protection becomes less relevant. A home loan, vehicle loan or other significant liability can create a genuine need for insurance.
The difference is that the insurance sale will increasingly need to stand on its own merits.
NBFCs may therefore have to move from an embedded commission model to a customer-protection model, where the value of insurance is clearly explained and customer consent is separately obtained.
Brokers and Digital Platforms: Scale Will No Longer Be Enough
Insurance brokers and web-based distribution platforms have invested heavily in customer acquisition, comparison technologies, advertising and sales infrastructure.
Commission compression could place pressure on business models that depend heavily on acquisition revenue.
The response is likely to be greater automation. Digital KYC, automated comparison, AI-assisted servicing, renewal management and lower-cost customer acquisition could become increasingly important.
At the same time, reduced entry capital and simplified licensing could increase competition. Scale will therefore remain advantageous, but distributors may no longer be able to rely on high commissions merely because they control large volumes of business.
Digital platforms will increasingly have to demonstrate service efficiency rather than distribution power alone.
Could Lower Commissions Reduce Insurance Penetration?
This is perhaps the most important policy question.
India continues to have a substantial protection gap. Expanding coverage requires distributors to reach customers who may not actively seek insurance.
Lowering commissions may improve policyholder economics, but if remuneration falls below the cost of reaching underserved customers, distributors may concentrate on affluent urban segments where policies are larger and easier to sell.
The consultation framework recognises this challenge by permitting additional commission headroom for specified underserved markets.
That distinction is important. Distribution costs should not necessarily be uniform because the cost of acquiring customers is not uniform.
Selling digitally to an informed metropolitan customer is fundamentally different from developing insurance awareness in a rural market.
Will Policyholders Actually Benefit?
Lower commissions do not automatically produce lower premiums.
The real test will be whether reduced acquisition costs eventually translate into:
- better pricing;
- improved benefits;
- lower surrender penalties or charges;
- stronger servicing;
- better persistency; or
- greater investment in claims and customer experience.
If the savings remain entirely within insurer margins, the regulatory objective of improving customer value would only be partly achieved.
Greater commission disclosure and cost transparency could therefore become as important as commission caps themselves.
Mis-Selling: Economics and Conduct Are Connected
One of the strongest features of the consultation paper is that it does not treat mis-selling solely as an employee-training problem.
Incentives shape behaviour.
If a distributor receives significantly more remuneration for one product than another, the economics can influence what is recommended to a customer.
The proposed restrictions on volume-linked incentives, stronger suitability requirements, identification of the individual responsible for the sale and commission clawback in confirmed cases of mis-selling attempt to connect remuneration with accountability.
This could be more effective than relying only on additional disclosures that customers may not fully read or understand.
The Way Forward
The final framework will need to find a difficult balance.
Distribution must become more economical, but professional advice must remain viable. Mis-selling must be reduced, but legitimate sales activity should not be discouraged. Digital distribution should lower costs, but customers who require human assistance cannot be abandoned.
A sustainable model should increasingly reward four outcomes: appropriate sale, persistency, service quality and customer protection.
Insurers themselves will need to redesign products that are economical to distribute without relying on exceptionally high first-year payouts. Banks and NBFCs will need clearer separation between lending decisions and insurance sales. Agents will need to shift from transactional selling towards long-term portfolio servicing. Brokers and digital platforms will have to use technology to reduce acquisition costs.
Bima Sugam, the proposed Public Insurance Registry and wider digital infrastructure could also gradually reduce information and transaction costs, allowing the economics of distribution to improve without simply transferring the burden from distributors to insurers.
Conclusion
“Recalibrating Economics of Insurance Distribution” represents more than another revision of commission regulations. It questions a long-standing feature of Indian insurance: the extent to which growth should depend upon paying increasingly high amounts for access to customers.
IRDAI’s data suggests that distribution expenditure in several channels has grown much faster than the underlying premium business. Correcting that imbalance is a legitimate objective. But commission compression alone cannot solve India’s protection gap.
Insurance remains a complex product requiring trust, explanation, advice and post-sale service.
The ultimate success of the proposed framework will therefore not be measured by how much commission it removes from the system. It should be measured by whether India can create a distribution model in which customers receive better value, distributors remain economically viable, insurers grow sustainably and more people obtain appropriate protection.
That is the real recalibration required.
