New Delhi, Sep 24 (IANS) The Insurance Regulatory and Development Authority of India (IRDAI) has proposed major reforms in the insurance distribution framework, which include a simpler three-tier architecture aimed at lowering costs for policyholders, increasing transparency, and strengthening safeguards against widespread mis-selling.
The insurance regulator has released a public consultation paper on “Recalibrating Economics of Insurance Distribution”, outlining reforms covering distribution structure, expenses, and commissions to ensure greater transparency.
The IRDAI paper points out that base commission no longer reflects the true cost of insurance distribution, pointing out that additional payments such as promotional expenses, brand fees, and rewards increase total payouts by 30 per cent to 60 per cent above base levels.
Under the proposed new norms, insurers and large distribution entities will have to disclose their commission policies and structures in a simple and accessible manner. Specified commercial policies will also carry commission disclosures, enabling customers to be aware of the distribution costs built into the pricing. The consultation paper also proposes tighter measures to curb mis-selling and compulsory bundling of insurance with other financial products.
These include bringing direct and indirect remuneration within the regulatory definition of commission, and prohibiting volume-linked or reward-linked incentives for bank and Non-Banking Financial Company staff selling insurance. The IRDAI has also proposed linking the identity of the individual seller with each policy, placing information on mis-selling incidents in the public domain, and allowing commission claw-backs in cases of mis-selling.
According to the IRDAI draft paper, despite past regulatory changes, the cost of doing business for insurers remains persistently high. Commissions and payouts to distributors have outpaced premium growth, leaving the Indian insurance market with a high-cost, commission-led business model that hurts policyholder value and weighs on long-term persistency.
The consultation paper proposes capping general insurance commissions across the board, setting health insurance first-time commissions at 15 per cent to 20 per cent while restricting renewal and porting payouts to just 5 per cent to 10 per cent.
The draft paper limits first-year commissions for distribution entities to between 5 per cent and 20 per cent depending on tenure, down from much higher effective payouts that reached up to 60 per cent when accounting for promotional spends and rewards.
It also proposes linking distributor compensation more tightly to long-term policy retention while capping early payouts. Besides, mandatory covers like motor third-party policies will carry little to no commission.
The reforms propose a reduction in insurers’ Expense of Management (EoM) limits. For life insurers, the EoM limit would shift to a company-level basis linked to Gross Direct Premium Income (GDPI), with the ceiling proposed at 15 per cent within two years and 12.5 per cent within five years. For general insurers, the calculation would shift from Gross Written Premium (GWP) to domestic GDPI, while the EoM limit would progressively decline from 30 per cent of GWP to 20 per cent of GDPI within five years.
It highlights that between FY23 and FY25, new business premium generated through a sampled group of corporate agents rose 28 per cent from Rs 63,000 crore to Rs 80,000 crore. Over the same period, total distributor remuneration, including base commissions, rewards, and incentives, jumped 125 per cent from Rs 9,580 crore to Rs 21,600 crore. Effective distributor payouts now account for around 27 per cent of first-year life insurance premiums.
Similarly, in general insurance, broker commissions surged 173 per cent from Rs 6,348 crore in FY23 to Rs 17,348 crore in FY25, while routed premiums went up by only 37 per cent. Retail lines such as Motor Own Damage and Health insurance saw new business commission rates more than double during this period.
The paper has also highlighted severe distortion in bancassurance and loan-linked insurance products.
While banks account for nearly 45 per cent of private life insurers’ premiums, average commission payouts vary widely. Multiple tie-up bank arrangements command an average total payout of 33 per cent, with payouts ranging up to 72 per cent, compared with 13 per cent for single tie-up arrangements.
Sourced primarily at loan origination, Group Credit Life product payouts reached as high as 45 per cent in FY25, up from around 5 per cent in FY23, exposing customers to limited choice and product bundling risks, the paper further stated.
–IANS
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