Irdai proposes sweeping reset of insurance distribution system
The Insurance Regulatory and Development Authority of India (Irdai), through a consultation paper released on Wednesday, has proposed a sweeping overhaul of insurance distribution that could put pressure on insurers and distributors to reduce distribution costs and commissions, while giving policyholders greater choice in buying insurance.
The proposals include tighter Expenses of Management (EoM) limits, a return to product-level commission caps, a ban on compulsory bundling of insurance with loans by banks and non-banking financial companies (NBFCs), and changes to motor insurance distribution.
Expenses of management are the costs an insurance company incurs to run the business.
The draft reforms focus on areas where the regulator believes there are unnecessary distribution costs. For instance, there are significantly high commissions in motor insurance, even though some parts are mandatory.
The proposed caps vary significantly by product. With individual life insurance, for instance, the draft sets first-year commission limits for distribution entities between 5% and 20%, depending on the premium payment term, while agent limits range from 6.25% to 25%.
The proposed plan could transform insurance sales for insurers and intermediaries while giving policyholders greater flexibility to compare products and purchase coverage directly.
Irdai has proposed a glide path to lower insurers’ overall EoM over five years. Life insurers would have to bring EoM down to 15% of premiums within two years and 12.5% within five years. General insurers would have to reach 25% within two years and 20% within five years. Insurers already below these benchmarks would also face lower long-term targets.
The 2023 framework set an overall expense limit of 30% of gross premium written for general insurers and 35% for standalone health insurers, covering both commissions and other operating expenses. Life insurance had product-specific caps.
The regulator also proposes changing the basis for calculating EoM from Gross Written Premium to Gross Direct Premium Income, while tightening the treatment of commissions and reinsurance-related payments. It has also proposed mandatory cost audits of insurers and large distribution entities.
Variation in distribution costs
Commission limits will depend on how difficult a product is to sell, with lower payouts for products sold by multiple insurers and little or no commission for mandatory insurance products.
The move comes as Irdai’s data shows wide variations in distribution costs. For FY26, private life insurers paid an average commission of 9% of total premium mobilized, while private general insurers paid more than 20%. The proposed changes come shortly after Mint reported that a group of life insurers was seeking greater flexibility in EoM rules, arguing that premium-linked expense limits can constrain smaller and mid-sized insurers as they invest in distribution, technology and expansion.
Irdai also wants to replace the sector’s multiple categories of distributors with three broad types—Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions for Insurance.
Irdai said the distribution system is fragmented and governed by different rules for similar entities. It has proposed a single activity-based framework to simplify regulation.
Banks and NBFCs registered as insurance distribution entities would also be prohibited from compulsorily bundling insurance with their products and services, including loans. Package offers would still be allowed where there is a specific and demonstrable benefit to customers, such as certain complementary group insurance products offered alongside deposits or loans.
Irdai said the broader objective is to improve consumer outcomes, strengthen competition, increase operational efficiency, and support the sector’s sustainable growth.
Motor insurance
Motor insurance is a key focus of the proposed reforms, with Irdai linking high commissions to the distribution structure. Average motor insurance commission stood at 24%, ranging from 13% to 50%, despite third-party insurance being mandatory and premiums being regulated.
OEM brokers and Motor Insurance Service Providers (MISPs) accounted for 30% of motor premiums in FY25, generating ₹29,000 crore in premiums and receiving nearly ₹7,050 crore in commissions. Motor premium grew 34% between FY23 and FY25, while commissions rose 259%.
Irdai proposes moving away from multilayer distribution, promoting digital purchases and lowering commissions on mandatory third-party insurance. The regulator described motor insurance as a “prime example of lack of transparency driving high commissions” despite part of the product being mandatory.
Larger dealers would have to register as Insurance Distribution Entities, while smaller dealers would operate as points of sale persons or insurer associates.
Dealers would also have to offer customers the option to buy through platforms such as Bima Sugam and could not deny cashless repairs based on where the insurance was purchased.
Key takeaways
- Irdai plans tighter expense limits to reduce industry distribution costs.
- Commission caps may return after earlier reforms removed restrictions.
- Banks could lose the ability to mandate insurance alongside loan products.
- Motor insurance commissions face scrutiny amid transparency and affordability concerns.
- Consumers may gain more choice through direct insurance purchase channels.
