Insurance commissions may fall: What IRDAI’s new distribution rules mean for policyholders

IRDAI has proposed a new commission framework for insurance distributors, with payouts linked to the type, complexity and servicing requirements of policies. The changes could reduce distribution costs, but industry players have warned that lower commissions may affect the availability of low-premium products and insurance access in smaller markets.

Insurance commissions could undergo a significant overhaul under a new proposal by the Insurance Regulatory and Development Authority of India (IRDAI), which is seeking to lower distribution costs while making the sector more transparent and customer-centric.

Under the proposed framework, commission limits would no longer follow a uniform approach. Instead, they would take into account the insurance segment, line of business, distribution channel, product complexity and the effort involved in selling and servicing a policy.

Lower distribution costs could affect product availability

IRDAI has also proposed requiring insurers and large distribution entities to disclose their commission policies and structures in a simple and accessible manner. Certain commercial insurance policies would also carry commission disclosures.

The proposed changes are part of a wider overhaul of insurance distribution. IRDAI has proposed recalibrating the Expense of Management (EoM) framework through lower limits and a phased glide path.

For life insurers, the EoM limit would shift to a company-level basis linked to Gross Direct Premium Income (GDPI), with the limit proposed at 15 within two years and 12.5 within five years. For general insurers, the calculation would move from gross written premium to domestic GDPI, with the EoM limit proposed to decline from 30% of GWP to 20% of GDPI over five years.

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IRDAI said the proposed reduction in EoM is intended to lower the overall cost of insurance, potentially expanding the risk pool in general insurance and improving returns to policyholders in life savings products.

InsuranceDekho flags low-premium policy concerns

However, the industry has raised concerns about whether lower commissions could make some low-premium products less attractive for distributors, potentially affecting their availability.

Indraneel Chatterjee, COO and Co-Founder of InsuranceDekho, said the reduction in distribution costs needs to be balanced against the economics of serving different products and customer segments.

“Bringing down distribution costs is an important objective, but it needs to be pursued alongside the larger goal of expanding insurance penetration,” Chatterjee said.

He highlighted two-wheeler insurance as an example, saying a 5% commission on an own-damage premium of ₹800 would leave around ₹40 at the distribution entity level before accounting for the economics of the Point of Sales Person (PoSP).

“At such levels, it could become difficult to sustain a distribution network for lower-value policies, potentially making this segment less attractive for those on the ground,” he said.

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Smaller cities could feel the impact

Chatterjee also cautioned that if distribution economics weaken, intermediaries could increasingly focus on higher-value policies. This, he said, could affect the availability of insurance distribution in smaller cities and underserved markets.

The economics of PoSPs are another concern. According to Chatterjee, a PoSP typically sells three to four policies with a combined premium of about ₹20,000. At a 4% commission, net of broker retention, this translates to roughly ₹800, which may not provide sufficient incentive to retain distribution personnel given the customer acquisition and servicing effort involved.

Customer choice and competition

He also flagged a potential impact on customer choice if commission structures encourage distributors to align with fewer insurers. This could, according to him, increase concentration among larger players and affect competition and product innovation.

Alongside commission reforms, IRDAI has proposed stronger safeguards against mis-selling, including making suitability an enforceable obligation, documenting customer needs for specified life insurance sales and maintaining an audit trail.

The regulator has invited comments on the consultation paper until October 25. The stated objective is to create a more efficient and transparent distribution ecosystem while balancing the interests of policyholders, insurers and distributors.

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(With PTI inputs)