IRDAI Plans Insurance Distribution Overhaul, Commissions And Mis-Selling Face Tighter Rules

New Delhi: The Insurance Regulatory and Development Authority of India (IRDAI) has proposed sweeping changes to insurance distribution, targeting high commissions, hidden payouts and mis-selling while seeking to lower costs for policyholders.

The proposals are part of IRDAI’s consultation paper, “Recalibrating Economics of Insurance Distribution”, which envisages a simpler three-tier distribution architecture alongside tighter expense and commission rules.

Hidden Payouts Under Scanner

IRDAI said base commissions often fail to capture the actual cost of distribution. Promotional expenses, brand fees, rewards and other payments can push distributor payouts 30 per cent to 60 per cent above base commissions.

Under the proposed framework, insurers and large distributors would have to disclose commission policies in a simple, accessible format. Certain commercial insurance policies could also carry commission disclosures.

Tougher Action Against Mis-Selling

The regulator proposes bringing both direct and indirect remuneration within the definition of commission.

Volume-linked and reward-linked incentives for bank and Non-Banking Financial Company employees selling insurance could be prohibited.

Each policy could also be linked to the identity of the individual seller. Mis-selling information may be placed in the public domain, while insurers could claw back commissions where mis-selling is established.

Commission Caps Proposed

For health insurance, first-time commissions are proposed at 15 per cent to 20 per cent, while renewal and porting commissions could be restricted to 5 per cent to 10 per cent.

First-year commissions for distribution entities could range between 5 per cent and 20 per cent depending on policy tenure. Mandatory products such as motor third-party insurance could attract little or no commission.

Distributor compensation may also be linked more closely with long-term policy retention.

Insurers' Expenses To Fall

For life insurers, Expense of Management limits could move to a company-level framework linked to Gross Direct Premium Income. The ceiling is proposed at 15 per cent within two years and 12.5 per cent within five years.

For general insurers, the EoM ceiling could progressively decline from 30 per cent of Gross Written Premium to 20 per cent of domestic GDPI within five years.

Distributor Payouts Surge

IRDAI highlighted a sharp divergence between premium growth and distributor remuneration.

Between FY23 and FY25, new business premium through sampled corporate agents increased 28 per cent from Rs 63,000 crore to Rs 80,000 crore. Distributor remuneration, however, surged 125 per cent from Rs 9,580 crore to Rs 21,600 crore.

In general insurance, broker commissions jumped 173 per cent to Rs 17,348 crore, while routed premiums increased only 37 per cent.

Bancassurance is another key concern. Multiple tie-up bank arrangements recorded average payouts of 33 per cent, reaching as high as 72 per cent in some cases.

Group Credit Life payouts also climbed to as much as 45 per cent in FY25, highlighting concerns around customer choice, loan-linked insurance and compulsory product bundling.