The Insurance Regulatory and Development Authority of India recently issued a consultation paper titled ‘Recalibrating Economics of Insurance Distribution’, proposing changes to distribution, expenses and commissions. The aim is to increase transparency, discourage mis-selling and deliver greater value to policyholders. However, by treating different types of insurance sellers alike, the paper risks hurting those who reach India's least-insured households.

India's insurance industry has undergone a structural transformation over the past decade. From a market dominated by a handful of public-sector insurers and conventional agency-based distribution, it has evolved into a diversified sector. Annual premiums amount to ₹11.93 trillion, while insurers manage assets worth ₹74 trillion. Yet large sections of the population remain uninsured. Premiums equal 3.7% of GDP, about half the global average of 7.3%. Insurance density stands at $97 (₹9,200), against a global average of $943 (₹85,000). Affordability, inadequate protection, uneven geographical coverage, product complexity and claims-related disputes remain significant concerns.

Four proposed changes in IRDAI's paper warrant attention. First, insurers would have to limit the proportion of premiums spent on business expenses, including operating costs and commissions. Second, IRDAI proposes fixing maximum commissions for each product category. Third, individual agents would be subject to different commission rules from institutional distributors such as banks. Agents would also receive a smaller share of their commission upfront, with more paid in instalments while the policy remains active. Finally, intermediaries would be regrouped into three categories: distribution entities, distribution persons and market infrastructure institutions.

Together, these measures mark a sharp departure from the flexible commission framework introduced in 2023, which allowed insurers to set commissions within overall expense limits.

The regulator's concern is rising costs. In 2024-25, life insurers spent ₹20 of every ₹100 collected in premiums on running their businesses, including commissions, up from ₹16.50 in 2020-21. Commission payouts also vary widely. Private life insurers paid ₹9 in commission per ₹100 of premiums last year, compared with ₹5 paid by LIC. Private general insurers paid ₹20. Commission payouts have also grown faster than premiums, increasing the share of customer payments going to distributors. IRDAI argues that high commissions encourage aggressive selling, often of products customers do not need.

These concerns are legitimate. But lower commissions do not automatically translate into lower premiums. Insurers could retain the savings as profits or use them to offset medical inflation and other costs. Commission cuts, therefore, cannot be assumed to deliver better value to policyholders.

The paper also proposes curbs on forced bundling, clearer identification of individual sellers and recovery of commissions where mis-selling is established. These measures could improve accountability, but the paper does not adequately explain how complaints will be investigated or violations established. Policy persistency is another concern: fewer than half of life policies survive beyond five years. Linking more of an agent's compensation to policy continuation is sensible. But if commissions fall too sharply, distributors may have even less incentive to service existing customers.

Distribution Risks

This is particularly important because insurance often requires explanation, personalised advice and continuing support. The need is greatest in rural areas and among first-time buyers. Lower commissions may improve efficiency in urban markets, but could discourage distribution in lower-income and geographically dispersed markets, where acquisition costs are higher. A reform intended to reduce costs could end up shrinking coverage.

The risk is particularly acute for Point of Sales Persons (PoSPs), who typically work part-time in smaller towns, sell standardised products and earn on a per-sale basis. Agents tied to insurance companies, by contrast, work full-time and build a book of policies and renewals over several years. Yet the paper proposes placing both under the same category, with similar commission caps and a shift towards deferred payments. Deferral may suit a full-time agent with an established renewal book, but penalise a part-time seller whose income depends on individual transactions.

PoSPs have had little say in the consultation process. IRDAI should bring them into the discussion and design commission and transition rules around the realities of their work.

The regulator can pursue its objectives with less collateral damage. It should consider allowing higher acquisition compensation for underserved markets and products that require substantial advice, while maintaining tighter controls on high-volume, low-effort distribution. It should also explicitly reward servicing. Renewal compensation must reflect genuine customer support, claims assistance and policy persistency, rather than merely the passage of time.

Crucially, IRDAI should test whether lower commissions actually reduce premiums. It should track affordability, claims outcomes, persistency and coverage alongside distribution costs over a sufficiently long period before making further changes to commission structures.

Finally, the reforms should be phased in. Existing renewal books and distribution arrangements need transitional protection. Abrupt changes could destabilise sellers' incomes and disrupt insurers' distribution strategies. A gradual transition would give distributors and insurers time to adapt without undermining the existing network.

India has built a much larger insurance industry, but not yet a comprehensively insured society. The next phase of reform must focus not just on reducing distribution costs, but on improving the quality, affordability, adequacy and reliability of cover. IRDAI should allow adequate time for consultation and remain open to alternative policy designs. The objective must be to make insurance more affordable without making it harder to reach the people who need it most.