Containing costs

Irdai's proposals will help reduce mis-selling

The Insurance Regulatory and Development Authority of India’s (Irdai’s) new consultation paper on recalibrating the economics of insurance distribution has led to sharp drops in stock prices of entities dependent on distributing insurance products, including banks and non-banking financial companies (NBFCs). The paper proposes reducing the commission insurers can pay distributors across products and channels, alongside tighter limits on insurers’ expenses. The market reaction reflects concerns that the proposed commission caps and lower expense limits could materially alter the economics of selling insurance. Irdai, however, has identified a genuine problem. Distributor payouts have grown much faster than insurance premiums. Between 2022-23 and 2024-25, commissions paid by insurers increased almost fourfold. In general insurance, premiums sourced by brokers rose 37 per cent while commissions increased 173 per cent. For life-insurance corporate agents, premiums rose 28 per cent as against a 125 per cent increase in commissions. Thus, the cost of distribution seems to be rising without a commensurate increase in insurance coverage. 

For banks and NBFCs, insurance distribution has become a high-margin, capital-light source of income, leveraging existing branches and customer relationships. Irdai’s proposed caps are, therefore, aimed at changing incentives, not merely reducing costs. The new framework would link commissions to the insurance segment, product, distribution channel, complexity, and effort involved. The proposed limit on life insurers’ expenses of management would also be tightened, with the limit moving towards 12.5 per cent of gross premium in five years, while for general insurers it would move towards 20 per cent. There is a strong consumer-welfare aspect behind this shift. High upfront commissions can encourage distributors and employees to prioritise sales over suitability, which can result in mis-selling of insurance products. The regulator has argued that insurance markets should compete on price, product quality, and suitability rather than on the size of commissions. It has also said that the idea is to simplify the architecture for distribution. 

A system that pays several times more for acquiring a new customer than for retaining an existing one naturally places greater value on selling policies than on keeping them active. In this context, a recent note by CareEdge Ratings has suggested deferring part of the first-year commission, linking payouts to 13th- and 25th-month persistency, and clawing back commissions when policies lapse early. This could align distributor incentives more closely with the customer’s long-term interests. Such structures must be considered. This matters because India’s problem is not simply expensive insurance distribution but also inadequate coverage. Insurance penetration was only 3.7 per cent of gross domestic product in 2024-25, compared to over 6 per cent in developed markets. However, if lower commissions make low-ticket, low-margin policies unattractive to sell, distributors could concentrate on affluent customers. This would make it harder to extend insurance to smaller cities and lower-income households. These are precisely the segments that need greater financial protection. The challenge, therefore, is to prevent commission-led mis-selling without weakening the distribution capacity. 

The experience of the mutual-fund industry offers hope. Rules on the costs of distribution and management over the years have not affected the growth of the industry. In fact, improving penetration and fund flows have created a reliable and growing pool of risk capital for Indian businesses. Awareness campaigns have arguably played a significant role. The insurance sector also needs to work on pull factors rather than remain a push category. Reducing costs would be a good starting point.