A Quiet Reform That Puts India’s Insurance Model on Notice

India's insurance sector has spent nearly 20 years dodging a simple question about who gets paid, how much, and why. 

The Act's headline grabber is 100% foreign direct investment in insurance companies, but the change that matters more is quieter and more technical. It gives the Insurance Regulatory and Development Authority of India statutory power to cap commissions. For an industry built on upfront payouts, moral suasion has never worked.

The numbers explain why the regulator has finally moved from sermons to sanctions. Commission payments by life insurers jumped 18% to ₹608 billion in 2024-25, even as premiums grew only 6.73%, and the number of new individual policies sold fell 7.4% year-on-year to 27 million, with individual non-single policies falling 19.1%. Operating costs for life insurers are at roughly 4% of assets under management, while general insurers are close to 27% of premiums. This translates into higher premiums and thinner returns, which quietly tax policyholders to subsidise distributors.

Broken Incentives
Four product categories show how far incentives drifted from protection to pay-outs. Loan-linked life insurance has turned into a commission annuity for lenders rather than a safety net for borrowers' dependants. Non-linked savings products with limited cover, often only 10 times annual premium as sum assured, carry disproportionately high first-year commission ratios at leading private life insurers. Mandatory third-party motor policies, with standardised tariffs and low complexity, still pay outsized commissions on new vehicles. Retail health insurance sees renewal commissions persist even when intermediaries add little after the first sale.

Banks and large distributors have quietly converted this into a steady yield business. HDFC Bank's insurance commission income reached ₹63 billion in 2024-25, or 7% of its profit before tax. Life Insurance Corporation of India paid the highest absolute commission of over ₹253 billion, while private insurers collectively paid nearly ₹299 billion. These are not fees for customised advice, but money extracted from captive customers. Banks control the relationship, insurers need the access, and policyholders pay for it through higher costs and lower value.

The new law aims to puncture this cosy triangle. The regulator can now set hard limits on commissions, remuneration, and rewards, mandate disclosures, and regulate how and when intermediaries get paid. Draft regulations being discussed include deferring commissions over three years for individual agents and five years for large banks and brokers. Deferral may improve persistence, but without absolute caps tied to genuine protection value, excess will simply be spread over time.

Composite licences could emerge as the Act's other quiet change with teeth. Allowing a single entity to write life, general, health, and re-insurance business promises operating efficiencies and simpler customer experience. More importantly, insurers could deepen direct relationships instead of relying on distributors at ever-rising rates.

All this hinges on execution. The Act is law, but composite licensing requires the regulator to resolve capital ring-fencing rules and solvency calculations for entities that offer life and non-life insurance. Agent licensing already permits selling life and non-life policies, yet few bothered as old commission economics favoured specialisation and high upfront payouts. If the rules under the Act drag into late 2026, incumbents get another year to entrench distribution lock-in and to repackage rich commission structures under the guise of complexity.

Valuation Reset
Investors must redraw their excels sheets and models. The era of valuing insurers as commission-driven distribution stories is ending. Margin gains will accrue to disciplined underwriters, while bank-led, commission-heavy models will see embedded value tested under tighter capital and cost regimes.

Distributors face a structurally lower return on equity as commission caps and deferrals will squeeze bancassurance and large agency networks built on high upfront payouts. However, one can expect pushback coming disguised concern for last-mile inclusion and rural reach. That will ring hollow as the fact is that while commissions rose 18% new policy sales fell 7.4%.

Policyholders should, in theory, be the winners. Lower distribution costs mean cheaper premiums or better benefits, both long overdue. Stronger KYC, tighter data protection, and a Policyholders Education and Protection Fund funded by penalties signal consumer welfare, at least on paper. If the regulator uses its new powers decisively rather than decoratively, mis-selling becomes harder and churn-driven models less attractive to shareholders.

Capital liberalisation through 100% foreign ownership will attract global players with technology and risk expertise, which will help fund a cleaner market structure. Cheap capital, however, cannot permanently subsidise bloated distribution. If commission caps are watered down or laced with generous carve-outs, the system will revert to form, with clever product design masking old economics in new wrappers.

For now, India's insurance reset is less about foreign ownership and more about reminding the industry its founding purpose. Insurance was not meant to be sold like a luxury good, with margins justified by mystique and opacity. It was meant to pool risk cheaply and fairly for households. The new law gives the regulator sharper tools to push the system back towards that basic function. The real test is not how tough the watchdog looks on paper, but whether investors stop rewarding insurers for scale they never truly owned.