Insurance distribution expenses have increased significantly faster than the premiums generated through some sales channels, prompting the Insurance Regulatory and Development Authority of India (IRDAI) to propose stricter controls on commissions paid to agents, brokers, banks and other intermediaries.
The proposed changes could alter how insurers structure distributor payments and acquire new customers. Data cited by Zerodha from IRDAI shows that distributor remuneration increased around four to five times faster than premiums between FY23 and FY25, with a particularly wide gap in life insurance corporate-agent and general-insurance broker channels.
Distribution Remuneration Rises Faster Than Premiums
For life insurance corporate agents, premiums increased by 28% between FY23 and FY25, while distribution remuneration jumped 125%.
A similar trend was recorded in general insurance broking. Premiums increased 37% during the period, whereas distribution remuneration climbed 173%.
As a result, remuneration grew around 4.5 times as quickly as premiums in the life corporate-agent segment and nearly 4.7 times as quickly in general-insurance broking.
At the same time, the number of individual life insurance policies remained broadly stagnant during the period covered by IRDAI’s analysis. This has raised questions about whether the substantial increase in distribution expenditure has resulted in a corresponding expansion in insurance coverage.
What Is IRDAI Proposing?
IRDAI has proposed reintroducing product-level commission limits along with tighter controls on insurers’ overall Expenses of Management (EOM).
Before 2023, the regulator prescribed separate commission limits based on insurance products and distribution channels. These detailed limits were later removed, giving insurers greater flexibility in deciding distributor payouts, while overall EOM restrictions continued.
Under the proposed framework, commissions would once again vary according to the product and sales channel. Products that require comparatively less effort to sell could have lower commission limits.
Term insurance is one example of the proposed changes. Individual term-life first-year commissions currently averaged 51%, with some cases reaching as high as 81%. Under the proposal, the first-year commission cap for multi-year pure-term policies would be 25% for banks and brokers and 30% for agents.
Why Is the Regulator Looking at Commissions?
IRDAI’s proposal is based on the view that insurers are spending substantially more on distribution without seeing a similar increase in the number of people covered.
The regulator has also highlighted the bargaining position of certain distributors. Banks, lenders and vehicle dealers already have established customer bases, which can allow insurers to compete for access to those customers through higher commissions. In such situations, the payout may be influenced by the distributor’s negotiating strength rather than only by the effort required to sell an insurance product.
The proposed commission structure is therefore intended to bring greater alignment between the nature of a product, the distribution channel and the remuneration paid.
What Could Happen to Insurers and Customers?
If commissions are reduced, insurers could see lower customer-acquisition and distribution costs. This could potentially improve the amount of value retained by insurers from each policy.
However, lower distribution expenses do not automatically mean cheaper insurance for customers. Insurers could retain some of the savings, while factors such as claims costs, competition and product structure would continue to influence premiums.
Distributors may also respond by reducing sales and marketing expenses, increasing automation or concentrating on products that continue to provide comparatively higher remuneration. Banks and NBFCs could also face lower income from insurance-related fees.
The proposed rules remain under consultation, meaning the final framework may differ from the current draft. The eventual impact on insurers, intermediaries and policyholders will depend on the final commission limits and Expenses of Management rules adopted by IRDAI.
Disclaimer
The information in this article is based on the proposed regulatory framework and data cited in the source material. The proposals are subject to consultation and may be revised before final implementation. Actual commissions, insurance premiums and distributor payouts may vary depending on the insurer, product, channel and applicable regulations. Readers should refer to official IRDAI notifications and the relevant insurer for the latest information.