The Insurance Regulatory and Development Authority of India released a two-part consultation paper on insurance distribution economics on September 23. Most of the coverage has focused on the proposed commission caps and the market's reaction to them. Less attention has gone to an argument I found revealing: the paper says the need to cap commissions would be "far less" if the industry disclosed all its expenses, including commissions.
Disclosure is only half the answer. Yes, you should know what your policy pays the seller. But you should also be able to act on it. Insurance distribution costs vary across channels. You should be able to buy the same policy via a channel that passes the lower distribution costs to you as lower premium or better benefits. Without that, disclosure shows you the seller's incentive but gives you no way to save.
The numbers quoted in the paper show why this matters. Between FY23 and FY25, the new-business premium generated by banks and other corporate agents in IRDAI's sample rose 28%. What they earned, including commissions, rewards, incentives and other payments, rose 125%. In FY25 that came to about Rs 21,600 crore on roughly Rs 80,000 crore of new business, or about Rs 27 in every Rs 100. Your premium doesn't show this. For a given product, IRDAI notes, policyholders "generally pay the same premium irrespective of the distribution channel". It also warns that higher commission for particular products "can create incentives to favour those products irrespective of whether they offer the best fit for the customer". It is only reasonable that you know what the seller's incentives are before you commit to years of premium.
The return of commission caps
We have seen commission caps before. IRDAI's 2016 rules capped first-year commission at 40% on regular-premium term plans and at 15% to 35% on savings plans. They were not watertight. In 2022-23 the Directorate General of GST Intelligence investigated insurers and about 120 intermediaries for allegedly paying commission above the limits through "marketing services" invoices. The new paper itself calls insurers' booking of distribution payouts as operating expenses an "incorrect practice".
In April 2023, IRDAI replaced product caps with board-approved commission policies under an overall expense limit. The 125% jump in pay I mentioned earlier came in the two years that followed, and the paper says board approval "has often been a formality".
The paper now proposes bringing caps back and counting trips, gifts and brand fees as commission, backed by audits and board sign-offs. The seller's name would be printed on every policy and mis-selling would result in commission clawbacks. These are good measures. But the incentive to sell a fresh policy remains greater than the incentive to encourage policyholders to continue with an old one. On a savings plan with ten or more years of premiums, a bank or broker could earn 20% in the first year against 3% on each renewal, though renewal pay would rise for policies that stay in force.
How mutual funds solved this
Since January 2013, the Securities and Exchange Board of India (SEBI) has required every scheme to offer a direct plan, with no distributor commission and a lower expense ratio. Since October 2016, investors' half-yearly account statements show the commission their distributor earned on their holdings, gifts and trips included, alongside the expense ratios of the direct and regular plans. Investors can see what advice costs them, and choose if they want to pay for it.
Insurance is different. A life policy needs underwriting and years of administration, and selling direct has costs of its own. But where a channel costs less, the buyer should get the benefit. IRDAI has made some room for that. The paper tells distributors not to insist on the same price across channels and wants platforms such as Bima Sugam to charge fees "much lower than the current distribution commission rates". But nothing in the proposals requires every retail life policy to be available through a cheaper route that passes the saving on to you.
Disclosure stops short too. Insurers and large distributors would publish their commission policies and rates, and big-ticket commercial policies would show the commission on the document. But sign up for a savings plan at your bank branch, and nothing in the proposals requires anyone to tell you what the bank earns on it.
Also Read | Tightening The Grip: IRDAI's Course Correction On Insurance Distribution Costs
IRDAI has invited comments on the paper until October 25 at iib.gov.in/dr. There are two things I would like to see in the final rules. One, whoever recommends a policy should tell you what they earn on it, before you sign. That matters more in insurance than in mutual funds. A fund investor can always move to its direct plan later. Once a policyholder makes a choice, she is committing to years of premiums. Leaving early is costly. IRDAI's numbers illustrate this. Surrendering at the end of the first year, returns between 31% and 64% of the premium paid. So, before you commit, you should see the first-year and renewal commission on the plan recommended and on other plans you were shown, with bonuses and incentives spelt out, followed by a yearly statement of what the seller actually received.
Two, buyers must have a cheaper way to buy the same policy. Every retail life policy should be available directly from the insurer or through a platform such as Bima Sugam, with the lower distribution costs showing up as a lower premium, lower charges or better benefits, and a clear note of what advice and service each route includes. Then the choice is yours: pay for advice if you value it or buy cheaper without it.
But there is a catch. You could take an agent's advice and then buy through the cheaper route. IRDAI's paper already floats an answer: fees paid by customers instead of commissions paid by insurers. Advice has value, and buyers who want it would pay for it.
What should you do until then? An agent's code of conduct requires them to share their commission rates if you ask. So, ask. You will get a rate card, not what they earn on your policy. But it is better than nothing.
Ashok Hegde is the founder of Gyansurance.com, a term insurance education platform.
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