The Insurance Regulatory and Development Authority of India (IRDAI) has proposed significant changes to the country’s insurance distribution framework, with the aim of reducing costs for policyholders, improving transparency and strengthening safeguards against mis-selling, according to experts.
The regulator’s consultation paper proposes a simpler three-tier distribution structure along with limits on product-level commissions. Experts said the proposed framework could benefit customers over the long term, while also putting immediate pressure on the margins of distributors, including bancassurance partners and non-banking financial companies (NBFCs).
“Ultimately, the proposal aims to drive digital adoption, improve policy persistency and create a more sustainable, consumer-first marketplace. As the saying goes, ‘necessity is the mother of innovation’, and these changes will compel companies to be innovative,” said Debashish Banerjee, Partner, Deloitte India.
Proposed Changes to Motor Insurance Distribution
IRDAI’s consultation paper, titled ‘Recalibrating the Economics of Insurance Distribution’, proposes significant changes to remuneration in new-vehicle motor insurance.
Under the proposal, remuneration would be capped at nil for third-party motor insurance premiums and 5 per cent for own-damage and related covers. The framework would also include technology, awareness and related expenses within the applicable commission ceiling.
The existing Motor Insurance Service Provider (MISP) framework is proposed to be replaced with a broader Insurance Distribution Entity (IDE) regime.
“The changes would directly affect automobile dealers, OEM-linked brokers, insurers and other motor insurance distributors quite drastically. By reducing upfront earnings from new-vehicle policies and tightening dealer-linked arrangements, the proposals could further compress distribution margins,” said Shailaja Lall, Partner at Shardul Amarchand Mangaldas & Co.
Greater Choice for Insurance Customers
The proposed framework also seeks to create a clearer separation between insurance sales and other relationships maintained by vehicle dealers.
Under the proposals, dealers would not be allowed to deny cashless repair services solely because a customer purchased an insurance policy through another channel.
IRDAI also wants customers to have greater access to alternative digital insurance platforms, including Bima Sugam. Vehicle dealers would be required to prominently inform buyers about this option when a vehicle is sold.
According to Lall, these changes could alter the traditional dealer-led model, where insurance sales, vehicle financing and after-sales services are closely connected. Pressure on distribution revenues could lead businesses to focus more on renewals, servicing, technology and other permitted value-added services.
Proposed Caps on Insurance Commissions
The consultation paper also proposes an across-the-board cap on commissions in general insurance. For health insurance, first-time commissions are proposed to be limited to 15 per cent to 20 per cent, while payouts for renewals and portability would be restricted to 5 per cent to 10 per cent.
For distribution entities, the draft framework proposes first-year commissions ranging between 5 per cent and 20 per cent, depending on the policy tenure. This would represent a reduction from significantly higher effective payouts, which could reach up to 60 per cent when promotional spending and rewards are included.
Experts said the eventual impact of the proposed reforms will depend on the provisions that IRDAI ultimately adopts and the transition framework introduced alongside them.
Disclaimer: This article is based on the proposals and expert comments outlined in the IRDAI consultation paper. The proposed measures may change before final implementation. Readers should refer to official regulatory announcements for the latest and final position.