IRDAI is considering an effort-based commission model for insurance distributors, but life insurers warn lower payouts could make low-cost and group life covers less viable.
The Insurance Regulatory and Development Authority of India (IRDAI) is considering a new framework that could link insurance distributor commissions to the amount of effort involved in selling and servicing policies.
The proposed approach is expected to classify distribution channels based on the level of work required to acquire customers and provide ongoing services. While the move could improve transparency and address concerns over excessive commissions, life insurers are worried about its possible impact on affordable insurance products.
Under the proposed framework, distribution channels could be placed into an effort-based hierarchy.
Individual insurance agents are expected to receive the highest commission ceiling, followed by brokers, bancassurance distributors and corporate agents. At the lower end could be original equipment manufacturer (OEM) channels, such as automobile dealers, along with web aggregators.
The final hierarchy and commission limits are yet to be officially released.
The regulator's approach is aimed at ensuring that distributor payouts reflect the actual effort involved in selling and servicing insurance products.
Life insurance companies broadly acknowledge that commissions paid through some institutional channels may need closer examination. However, insurers are concerned that applying a broad effort-based model could make certain low-premium products commercially difficult to distribute.
This concern is particularly relevant to group insurance and credit-linked life covers, where premiums are generally small but distribution takes place through large institutional networks.
If commissions fall significantly, distributors may have less incentive to offer these products, potentially affecting the number of customers who receive insurance protection.
One of the major concerns is the possible impact on low-income borrowers who often receive insurance through banks, non-banking financial companies (NBFCs) and microfinance institutions.
These institutions frequently distribute group credit-life insurance alongside loans. Such covers can provide financial protection to borrowers and their families by helping settle outstanding loan obligations in the event of the borrower's death.
If distribution becomes financially unattractive because of lower commissions, insurers and distributors could reduce their focus on these products.
As a result, customers who may not purchase individual life insurance independently could lose access to affordable protection.
Corporate agents and brokers have become important distribution channels for India's private life insurance industry.
Together, these channels accounted for more than Rs 61,000 crore, or around 60%, of new business premium generated by private insurers in FY25, according to industry figures cited in the report.
Their importance extends beyond conventional life insurance sales. Banks, financial institutions and other corporate distribution partners also help insurers reach customers through group and credit-linked insurance products.
This makes any significant change to institutional commission structures potentially important for the overall insurance market.
IRDAI's proposed commission changes come amid concerns that high distributor payouts can encourage inappropriate selling practices.
The regulator has also started seeking information on commission payments from intermediaries as part of its efforts to improve transparency and examine how incentives influence insurance distribution.
A commission structure linked more closely to actual selling and servicing effort could potentially reduce incentives for mis-selling and encourage better customer outcomes.
However, insurers argue that the framework needs to account for the different economics of various insurance products and distribution channels.
Individual insurance policies and institutional products do not require the same distribution model.
A distributor may have to undertake considerable administrative and servicing work even when the insurance premium is relatively small. If the commission ceiling is too low, the cost of acquiring and servicing the customer could exceed the revenue earned from the policy.
This could make some low-value insurance products less attractive to distributors.
The industry therefore wants IRDAI to consider the economics of affordable insurance while designing the final commission framework.
The debate is particularly significant because life insurance penetration in India remains relatively limited. According to industry figures cited in the report, life insurance penetration stood at 2.7% of GDP in FY25.
This highlights the importance of distribution networks in reaching customers who may not actively seek out insurance products on their own.
For many borrowers, particularly those accessing smaller loans, insurance offered through a lending institution may be one of the easiest ways to obtain financial protection.
The government and insurance industry have been working towards the broader objective of achieving Insurance for All by 2047.
Industry representatives caution that reducing distribution incentives too sharply could work against this objective if fewer low-income customers are covered.
The concern is not necessarily that insurance premiums would become more expensive. Instead, the bigger risk is that distributors could stop offering certain low-premium products if the economics no longer support their distribution.
This could leave a section of financially vulnerable customers without adequate insurance protection.
The proposed changes underline the need for a balance between controlling excessive commissions and ensuring that insurance remains accessible.
A well-designed effort-based system could help discourage inappropriate sales practices while still allowing distributors to earn enough to serve customers effectively.
Industry stakeholders are likely to closely examine the final framework once IRDAI releases the proposed commission hierarchy and corresponding limits.
IRDAI is expected to continue consultations and gather information from insurers and intermediaries before finalising the framework.
The key challenge will be designing commission limits that reflect the effort involved in different forms of insurance distribution without making affordable and group products commercially unviable.
The final rules could have a significant impact on how banks, NBFCs, brokers, corporate agents and other intermediaries distribute life insurance across India.
Conclusion
IRDAI's proposed effort-based commission framework could bring greater transparency and accountability to insurance distribution, but insurers warn that strict commission caps may affect low-cost and group life covers. With institutional channels playing a major role in reaching borrowers, the regulator will need to balance consumer protection with the need to expand insurance coverage. The outcome could be particularly important for India's goal of achieving Insurance for All by 2047.