Irdai commission cap plan sparks concern among insurance brokers

Brokers say lower payouts may not necessarily translate into cheaper premiums and could instead squeeze servicing economics, trigger consolidation, and weaken insurance distribution

The insurance regulator’s proposed overhaul of insurance distribution economics has unleashed widespread concern - and some pushback - across the insurance industry over its potential impact on customer servicing, distribution networks, employment, and business growth in the near term. Brokers argue that lower commissions may not necessarily translate into cheaper premiums for policyholders but might reduce the reach to the rural areas.

 

The Insurance Regulatory and Development Authority of India (Irdai), in its consultation paper released in September, has proposed product- and channel-specific commission caps alongside a phased reduction in insurers’ expenses of management (EoM). The measures are aimed at improving cost discipline, transparency, competition and policyholder value following an increase in commissions and expenses under the framework introduced in 2023.

 

The insurance regulator has also raised concerns about high commissions. Irdai, in its consultation paper, said banks accounted for nearly Rs 68,000 crore of corporate-agency premium in the life insurance business in the sample studied. Payouts were significantly higher in multiple-tie-up arrangements than in single-tie-up models, suggesting that remuneration is driven more by competition for distribution relationships than by the effort involved in distribution, the regulator said.

 

The NBFC channel has also emerged as one of the fastest-growing distribution channels for life insurance. New business premium sourced through NBFCs nearly tripled to Rs 10,300 crore in FY25 from Rs 3,600 crore in FY23, while payouts to NBFCs rose to Rs 4,300 crore, or about 42 per cent of the premium sourced, Irdai said. In case of motor insurance, Irdai said that motor premium grew 34 per cent from FY23 to FY25, while motor commission grew 259 per cent, with third-party commission rising from 4.3 per cent to 22 per cent despite regulated pricing

 

The proposed caps, meanwhile, are well below prevailing industry rates across several segments. Term insurance commissions, for instance, are proposed to be capped at 30 per cent for individuals and 25 per cent for corporate distributors, against up to 51 per cent currently. Health insurance commissions could be capped at 20 per cent and 15 per cent, respectively, for individual and corporate distributors, versus 24 per cent currently, while motor and savings products could see caps of 0-15 per cent and 5-25 per cent, compared with prevailing rates of 26 per cent and 14-37 per cent, respectively.

 

The proposals, which also tighten rules on indirect distributor payments and increase disclosure requirements, could change the current business model of insurance distribution.

 

The broking industry has urged Irdai to adopt a calibrated approach that addresses excessive distribution costs without undermining the infrastructure needed to acquire and service policyholders.

 

Industry representatives have argued that the proposed changes could disrupt the economics of insurance distribution unless the regulator accounts for differences in products, distribution channels, customer acquisition costs, and servicing requirements.

 

In a press statement, The Insurance Brokers Association of India (IBAI), which represents 798 licensed insurance brokers, has urged the regulator to retain the 2023 EoM framework, publish a regulatory impact assessment, and focus stricter commission controls on credit-linked and other sales where customers have limited choice.

 

The motor broking industry has raised similar concerns, arguing that reforms should be assessed on whether they reduce the customer’s total cost while preserving access to insurance, renewals, claims assistance and servicing.

 

“While the intention of the consultation is directionally correct, this will make it unsustainable for brokers to continue business and might result in consolidation or exits for the industry," said a broker, who declined to be named. "In case of commercial lines, the rates are already going down, with the revenue reducing because of the discounting in certain lines of business. The consultation paper in the existing format will make it difficult to reach the customer and making Insurance for All by 2047 reality because servicing becomes difficult.”

 

The IBAI has cited the consultation paper’s figures showing that general insurers’ EoM declined from 28.2 per cent of premium in FY23 to 26.5 per cent in FY25, while premium grew by about 13 per cent annually. It said that the increase in reported commissions partly reflects the reclassification of payments previously recorded under other expense heads.