Tightening The Grip: IRDAI's Course Correction On Insurance Distribution Costs

Until 2023, the Insurance Regulatory and Development Authority of India (IRDAI) regulated expenses of insurers through a layered framework. Commission, as a component of expenses of management (EoM), was capped product by product, while the overall EoM ceiling was independently set by line of business. In 2023, IRDAI dismantled that architecture. Product-wise commission sub-caps were removed and "remuneration" and "reward" were folded into a single definition of "commission".

General insurers moved to a single EoM ceiling of 30% of premium and standalone health insurers to 35%, with boards free to allocate commission within that envelope. Life insurers, though freed from product-wise commission caps, retained segmental EoM limits within which commission had to fit. In 2024, IRDAI merged the separate EoM and commission regulations into one consolidated framework. The expectation was that greater flexibility would drive more efficient distribution and deeper insurance penetration, while reducing EoM.

The results tell a different story. Far from rationalising, expenses kept climbing. Private life insurers' expense ratio (total spending as a share of premium), which had fallen to 16.5% of gross premium in FY21, rose to 20.2% in FY26. Private general insurers hit 32.1% of premium on expenses, exceeding even the pre-2016 level. Commission fared no better. In FY26, private life insurers paid between 3% and 39% of premium as commission, and private general insurers between 15% and 31%. Much of the reduction in reported operating expenses appeared to be cosmetic.

ALSO READ: SBI Life Or LIC? JPMorgan Bets On Low-Cost Insurers Amid IRDAI's Distribution Reset: Top Picks

Since distribution-related payouts were reclassified as commission after the 2023 reforms, while one line item shrank, total EoM kept rising. IRDAI's 2026 consultation paper on distribution reforms has been in the works for a while, with initial murmurs being heard as early as March 2025. The consultation paper issued by the IRDAI on September 23 seeks to respond to these outcomes. It does not propose a return to the 2016 era of rigid product-wise caps, but a firmer, calibrated version of the 2024 model, aimed at steering the industry away from commission-led sales towards pricing and quality-led competition.

The proposals overhaul how expenses are measured. Currently, expenses are calculated against gross written premium (GWP), which includes premium received for absorbing risk underwritten by other insurers. This inward reinsurance inflates the denominator, making the expense ratio appear lower than it truly is. The proposals shift the base to gross direct premium income written in India (GDPI), stripping out inward reinsurance, while barring insurers from netting reinsurance receipts, other than for claims, against reported costs.

The limits then fall on a fixed reduction schedule. General insurers' 30% ceiling drops to 25% of GDPI in two years and 20% in five. Life insurers move from a segment-wise formula to a single EoM limit, as a percentage of total premium, targeting 15% in two years and 12.5% in five. Sector-specific carve-outs for technology spend for instance, are folded back into the overall limit. Enforcement gets teeth too, as cost audits become mandatory for insurers and large distributors, with curbs on new products, dividends and new business for those who miss their targets.

The more significant shift is on commission. The proposals reintroduce commission caps across life, health and general insurance, differentiated by distribution channel and the effort involved in the sale. An open-architecture distributor, free to sell several insurers' products, gets a lower ceiling than an agent tied to one insurer. Compulsory third-party motor cover, which requires minimal selling effort, earns no commission for institutional distributors, such as brokers and corporate agents, and nominal commission for agents.

Sales in small towns and rural areas where insurance penetration remains low, by contrast, earn rewards above the normal limits. In health insurance, a new policy can earn 15-20% commission, but renewals pay only 5-10% since existing customers need little persuasion. Life insurance follows a similar structure. First-year commission on a long-term policy can reach 20-25%, tapering to 3-5% on renewals. From the sixth policy year, renewal rates rise gradually up to a 7% cap, rewarding distributors who retain policyholders over the long term.

ALSO READ: IRDAI Takes An Axe To Commissions, Proposes Five-Year Expense Caps For Insurers: PB Fintech Hardest Hit

Every payment to a distributor, whether cash, gifts, incentives or brand-value support, would count as commission, with compliance certified by both the insurer's board and the distributor's management. These EoM and commission proposals are part of a wider industry reform. The consultation paper also proposes a fundamental overhaul of the intermediary framework, replacing the current patchwork of distributor categories with a simpler, more uniform structure, while product reforms are expected to follow by FY28.

For the industry, tighter limits mean costs would track effort and risk rather than bargaining power, encouraging insurers and distributors to compete on product quality, service and persistency. Though this hasn't been good news for distributors, for policyholders, it will translate into lower embedded costs, fairer pricing and quality-led sales. And For the economy, an insurance sector spending less on distribution and more on risk coverage is better placed to close India's protection gap, an essential shift towards achieving the goal of insurance for all.
 

This story is authored by Indranath Bishnu (Partner, Head-Insurance), Anirud Sudarsan (Partner) and Soumyaditya Dasgupta (Senior Associate), Cyril Amarchand Mangaldas.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.