IRDAI targets high commissions, mis-selling in distribution overhaul

India’s insurance industry has expanded significantly in the premium growth in recent years, but not sufficiently in actual coverage even as distribution costs, commissions and intermediary remuneration has escalated sharply. Insurance Regulatory and Development Authority of India (IRDAI) has been consistently working on bettering the industry’s dynamics. The recent consultation paper issued by the regulator is a step in that direction, addressing the reforms on the distribution and recalibrate its economics.

It proposes a comprehensive overhaul on the cost of customer acquisition, remuneration of the distributors, and align the entire architecture to work in the interests of the policyholders. The paper identifies distribution as a critical structural element of the insurance ecosystem and proposes reforms aimed at improving consumer outcomes, increasing competition, reducing operational frictions, improving efficiency and supporting sustainable expansion of the insurance coverage.

The consultation paper identifies ten pressing challenges across the insurance distribution ecosystem. These include the complexity of the existing distribution architecture, restrictions on the scope of distributors, rising expenses, commission structures, lack of transparency, compulsory bundling, mis-selling, the economics of motor insurance, the need for digital market infrastructure and the need for greater insurance awareness.

The underlying concern is that the economics of distribution can influence the behaviour of the entire ecosystem.The paper thus proposes moving towards a distribution system where competition, customer choice, transparency and efficiency are strengthened simultaneously.It proposes to simplify the architecture, expansion of legitimate activities of distributors, reduce unnecessary layers, reducing expenses and commission, and creating digital infrastructure that enables customers with an alternative to the traditional push-based system.

IRDAI argues that the distributors are rewarded primarily for procuring premiums rather than suitability, persistency, quality of advice, servicing, claims experience and long-term customer outcomes. This places interests of insurers, distributors and customers misaligned. The paper highlights the difference between acquisition and retention as incentives favor sales over persistence. Life insurance’s 61st-month persistency is only 48% while the online channel has 61st-month persistency of 71%. IRDAI shows this as evidence that an informed and direct purchase can result in better continuation of policies. IRDAI raises the concern that the insurers are competing for distribution access rather than competing primarily on price, product, quality and service. This is particularly true with general insurance broking where the motor commissions rose from about 9% to 25% while that of the retail health moved from 10% to 30%.

This could impact the affordability for the policyholders and/or reduced service levels by the insurers. It points to the significant post-sale service problems and customer grievances where in FY26, 63% of complaints disposed through Bima Bharosa were settled in favor of policyholders while 75% of cases disposed of at the Ombudsman level were settled in favor of customers. The regulator argues that large distributors have excessive bargaining power as insurers depend on them for larger volumes. The concern is that remuneration increasingly reflects control over customer access, rather than actual distribution effort. There are currently multiple categories of distributors with different capital/compliance requirements, permissible products, and obligations leading to regulatory arbitrage.

Lack of transparency is enabling to customers’ weakening power. The paper thus wants to create customer power through information, comparison, portability and direct purchase. The paper finds that the earlier 2023 framework which gave greater flexibility by moving away from the product-level commission caps towards entry-level EoM (Expenses of Management) limits, hasn’t produced the intended results.

The paper proposes to simplify the distribution architecture from the current eight categories to three types: IDE (Insurance Distribution Entity), IDP (Insurance Distribution Person) and MII (Market Infrastructure Institution). The objective is that entities performing similar functions should face similar entry/capital requirements, regulatory obligations and treatment. The paper explicitly links diversification of distributor income with reducing pressure for higher insurance commissions and so encourages to distribute other financial product (subject to the relevant regulator’s approval).

The regulator also proposes lower capital requirements, simpler registration and lower fees to encourage more distribution and greater competition, particularly in the underserved locations. The proposal raises bar for the distribution personnel with minimum educational qualification of Class XII, enhanced training, online testing, etc. Under the new proposal, general insurers will calculate the EoM using domestic Gross Direct Premium (GDP) instead of Gross Written Premium (GWP). And for life insurers, the proposal moves from simply rewarding first year acquisition to persistency. It includes greater renewal commission, lower commission for single premium and for those products with tax incentives.

Also, proposes restrictions on compulsory bundling, particularly where the customer has little ability to compare alternativeswhile motor insurance gets a separate reform package. The paper envisages a new digital distribution infrastructure (MII) providing a neutral, digital, pull-based alternative to the intermediary-led model. Bima Sugam is the primary example with possibly additional MIIs promoted by group of insurers.

The Public Insurance Registry (PIR) is intended to become the business facing Digital Public Infrastructure for the insurance. It’s imagined as regulator-owned, population-scale, interoperable, and non-exclusionary. The paper also proposes leveraging the Policyholder Education and Protection Fund (PEPF).

Arguably, the most critical aspect of the paper is the way IRDAI proposes to measure how the reforms work. Instead of publishing just the new rules, it included wide variety of metrics like EoM ratios, complaints and gradiences, persistency, PIR usage, customer satisfaction surveys, direct purchases, cost-audit results, commission payouts, etc. to make it an outcome-based reform framework. So, the paper is not a merely regulating the distribution channels but attuning the distribution dynamics with a feedback loop.

(The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst and could be reached at info@wealocityanalytics.com)