Why in news?

Recently, India's insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), issued a consultation paper titled "Recalibrating Economics of Insurance Distribution."

It covers distribution, structure, expenses and commissions. The aim is to improve consumer protection, reduce mis-selling and counter dark patterns. Comments are invited by October 25.

What’s in Today’s Article?

• Market Reaction
• Key Proposals
• Why IRDAI Is Acting?
• The Larger Backdrop
• Who Is Hit Hardest?
• Criticisms and Gaps

Market Reaction

• Analysts say that the reforms are good news for households but will eat into the profit margins of distributors.
• As a result, insurance shares did fall sharply recently.
  • PB Fintech (parent of Policybazaar): fell 36% on September 24, then 3% more on next day.
  • TurtleMint: slumped 20% on both days.
  • Many banks also ended lower.

Key Proposals

• Commission Caps - In life insurance, first-year commission would be capped at: 20% of premium for distributors; 25% for agents.
  • This is less than half of current commissions. The regulator had scrapped such caps in 2023.
• Lower Expense of Management (EoM) - EoM is the cost an insurer charges against premiums, including administrative and distribution costs such as agent commissions.
  • IRDAI proposes reducing it, over five years, to: 12.5% of gross direct premium for life insurers; 20% for general insurers.
  • Limits are also set for 2028–29. According to CareEdge Ratings, 20 of 22 life insurers and 28 of 31 general insurers currently exceed the proposed limits.

Why IRDAI Is Acting?

• IRDAI says sales are led by commissions, not by price and quality.
  • General insurance: premiums via brokers rose 37% between 2022–23 and 2024–25, but commissions rose 173%.
  • Life insurance: premiums via corporate agents rose 28%, but commissions surged 125%.
• So, distributors' income has grown 4–5 times faster than premiums.
• The paper says heavy dependence on commission-led distribution and opaque pricing has weakened competition and pushed value away from customers.

The Larger Backdrop

• FDI in insurance was raised to 100% in December last year, and notified in May 2026.
• India is the world's 10th largest insurance market, yet insurance penetration was only 3.7% in 2024–25.
• Insurance penetration means total premium (life and non-life) divided by GDP.

Who Is Hit Hardest?

• Online Aggregators - Policybazaar and TurtleMint face high customer acquisition costs and rely heavily on upfront commissions. They lack a network of agents like LIC, so caps hurt them most.
• Banks - Banks are key distributors because of cross-selling and deep networks.
  • Analysts note that banks with multiple tie-ups and heavy incentive-led payouts will suffer more than those with single partnerships.
  • Insurance distribution income for banks rose to 5.1% of profit before tax in 2025–26, from 3.5% in 2022–23.
  • Banks with insurance subsidiaries (HDFC Bank, ICICI Bank, SBI, Kotak Mahindra Bank) are relatively insulated, as they keep part of the savings through higher insurer margins.

Criticisms and Gaps

• Persistency is Not Addressed - Persistency means policyholders continuing to pay premiums. Experts say writing a new policy still pays a distributor several times more than retaining an old one.
  • They suggest:
    • Deferring part of first-year commission.
    • Vesting it against 13th- and 25th-month
    • Clawing it back on early lapse.
    • Flattening the gap between first-year and renewal commission.
  • Aggregators Perform Best on Persistency - IRDAI's data shows 71% of online-sold policies are active after five years, against 43% for those sold by corporate agents such as banks. Yet aggregators are hit hardest.
  • Penetration Risk - Caps may discourage insurers from selling low-ticket, low-margin policies, which drive penetration in non-tier-1 cities and among lower-income groups.
  • Smaller Insurers - Critics argue that the framework should recognise the structural cost differences of smaller insurers, so distribution stays competitive and inclusive.

Conclusion

IRDAI's proposals target a real problem: sellers earning more than buyers gain. Yet capping commissions alone does not fix lapsing policies, and it could squeeze the low-ticket products that widen coverage.

The final rules must protect consumers without pushing insurance away from the people who still lack it.