IRDAI, the insurance regulator, has proposed a set of reforms that could change how insurance is sold in India. The reforms are outlined in a consultation paper that suggests capping commissions paid to distributors, stopping banks from bundling insurance with loans, and limiting how much insurers can spend on commissions and operating expenses.
A company that distributes insurance, like Ditto Insurance, could see its revenues drop if these proposals become law. This is because insurers would have to share a smaller portion of premiums with distributors and agents as commissions. As a result, stocks of companies like Policybazaar and Turtlemint have fallen by as much as 30% over the last few days.
IRDAI’s intentions behind the proposed reforms are not wrong. Insurance penetration in India is low, at just 3.7% of the country’s GDP, compared to the global average of 7.3%. The regulator wants to increase insurance penetration and reduce mis-selling, which is a significant problem in the industry. According to IRDAI’s annual report, there were over 26,600 complaints of insurance mis-selling and unfair business practices in FY25 alone.
How Insurance is Sold in India
Insurers in India do not sell most policies directly to customers. Instead, they rely on a network of intermediaries like individual agents, corporate agents, banks, brokers, web aggregators, and car dealers. The way these distributors are paid changed in 2023, when IRDAI scrapped separate commission caps for different insurance products and introduced a broader ceiling called Expenses of Management (EoM).
This change gave insurers more freedom to decide how much they wanted to pay distributors for different products, as long as their overall expenses stayed within the prescribed limit. However, insurers began competing aggressively for distributors by offering higher commissions on profitable products, which created an incentive problem. For example, banks have a strong incentive to push insurance products through their network if they are offered high commissions.
This can lead to mis-selling, where customers are made to believe that buying a particular insurance policy is necessary, even when it is not suitable for them. IRDAI has been warning the industry about this problem and has proposed five big changes to address it. These changes include simplifying the distribution system, reducing the overall amount insurers can spend on distribution, and bringing back product-level commission caps.
The proposed changes also include making commissions more transparent and cracking down on mis-selling. Insurers and distributors would have to disclose more information about commissions and incentives, and if a sale is later found to have been improper, commissions could be clawed back. Additionally, IRDAI wants to build more digital infrastructure to make it easier for customers to buy and manage policies directly, reducing their dependence on commission-driven intermediaries.
These changes could hurt insurance distributors the most, as many of their business models benefited from the flexibility introduced in 2023. Insurers would also feel the pressure, as they would have less freedom to spend on commissions. According to Citi, distributor earnings from some types of insurance could fall by 70-90% if the changes become final.
The changes could also lead to consolidation in the industry, as smaller distributors with limited cash reserves may find it harder to absorb the hit. Larger players may be better placed to adapt to the new rules. The proposed changes are not final yet, and IRDAI has given the industry and other stakeholders a month to respond with their feedback.
Impact on Policyholders
The proposed changes could benefit policyholders in the long run, as lower distribution costs could mean lower premiums or more benefits from their policies. However, it depends on what insurers do with the savings. If an insurer spends less on commissions, marketing, and other expenses, a larger portion of the premium could remain available to pay claims.
Alternatively, insurers could choose to retain some of those savings and improve their margins. The benefit to policyholders would depend on how the savings are used. For example, if an insurer reduces its distribution costs, it could reinvest the savings in the policy, ultimately contributing to the benefits the policyholder receives over the longer term.
Next Steps
The proposed cap on first-year health insurance commissions is set at 15%, and renewals would be capped at 5%. Commissions on new-vehicle third-party motor insurance could be zero. These changes could have a significant impact on the insurance industry, and the regulator’s decision will be eagerly awaited by all stakeholders.
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