IRDAI Proposes Product- and Channel-Wise Commission Caps and a Glide Path to Lower Expense Limits

The news

Mumbai. The Insurance Regulatory and Development Authority of India (IRDAI) on Wednesday, September 23, proposed a major overhaul of how insurers pay commission to distributors, The Economic Times and The Indian Express report. Its consultation paper — a draft put out for public comment before rules are finalised — replaces a single cap across products with limits linked to segment, line of business, distribution channel, product complexity, policy size and the effort needed to sell and service a product; feedback is due by October 25. It also proposes a ‘glide path’, a phased reduction, in insurers’ expense of management (EoM), the total an insurer may spend on commission, salaries, marketing and other operating costs as a share of premium. Life insurers’ EoM would fall to 15% of premium in two years and 12.5% in five; general insurers’ limit would fall from 30% now to 25% in two years and 20% in five. In general insurance, the proposed first-year commission on individual health policies is 15% for distribution entities and 20% for individual agents, with renewal and portability commissions of 5% and 10% respectively; portability is a policyholder’s right to move to another insurer without losing continuity benefits. Retail property insurance carries the same 15% and 20% limits, and large property and engineering risks with a sum insured above ₹2,500 crore 5% and 5.5%. Insurance sold with loans or credit would have separate, lower limits, including 5% for motor own-damage, personal accident and liability cover and 5% for first-year health insurance. In life insurance, commission would depend on the premium payment term: for individual non-linked and linked policies paying premiums for 10 years or more, first-year commission is capped at 20% for distribution entities and 25% for agents, and for six-to-eight-year terms at 14% and 17.5%. For non-linked and unit-linked plans (whose returns track market-linked funds) with a policy term of up to five years, The Indian Express reports first-year caps of 6.25% for agents and 5% for corporate agents, brokers and composite brokers. An extra 10% of the applicable limit is proposed for individual policies sold in towns with populations below 10 lakh, and 20% for business from towns below 50,000 and rural areas. IRDAI says the aim is to cut distribution and operating costs and improve value for policyholders. The syllabus link is GS3 on financial-sector regulation and inclusive growth, and GS2 on regulatory bodies.

Static syllabus linkage

1. IRDAI is a statutory regulator whose mandate begins with the policyholder. The Insurance Regulatory and Development Authority was created by the IRDA Act, 1999, following the Malhotra Committee’s 1994 recommendation to open insurance to private players under an independent regulator; it is headquartered in Hyderabad. Under Section 4 of the Act, it consists of a Chairperson, not more than five whole-time members and not more than four part-time members, all appointed by the Central Government. Section 14 charges it to regulate, promote and ensure the orderly growth of the insurance and re-insurance business, and to protect the interests of policyholders. It usually makes rules through regulations and master circulars preceded by exposure drafts or consultation papers such as this one.
2. The Insurance Act, 1938 decides who may be paid for selling insurance and how much insurers may spend. Section 40 of the Insurance Act, 1938 prohibits paying commission or any reward for soliciting or procuring insurance business to anyone other than an insurance agent or intermediary. Sections 40B and 40C limit the expenses of management of life and general insurers respectively, and since the Insurance Laws (Amendment) Act, 2015 the actual limits have been set by IRDAI regulations rather than by the statute. Per PRS, the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, passed by Parliament on December 16-17, 2025, empowers IRDAI to specify regulations on remuneration, commission or reward payable to agents and intermediaries, including limits, the manner of payment and disclosures. The same law raised the foreign direct investment limit in Indian insurance companies from 74% to 100% of paid-up equity and created a Policyholders’ Education and Protection Fund administered by IRDAI.
3. Agents, corporate agents and brokers stand in different legal relationships to the buyer. An individual agent and a corporate agent — typically a bank selling insurance, known as bancassurance — represent the insurers they are tied to, and commission is their income. An insurance broker, including a composite broker that handles both insurance and reinsurance, is licensed to act for the client and is expected to compare products across insurers. That is why the proposal separates ‘agents’ from other ‘distribution entities’: it is pricing the effort, and the conflict of interest, in each channel. Mis-selling means selling a product unsuited to the buyer or misrepresenting its terms, and complaints go first to the insurer and then to the Insurance Ombudsman under the Insurance Ombudsman Rules, 2017, framed by the Central Government.
4. Penetration and density measure different kinds of under-insurance. Insurance penetration is total premium as a percentage of GDP, while insurance density is premium per head of population, usually expressed in U.S. dollars. A country can see rising density with flat penetration if incomes grow faster than insurance buying. IRDAI’s stated goal of ‘Insurance for All by 2047’ aims at both, and distribution cost is central because the commission and expense load is part of the premium a buyer pays. General insurance in India has been de-tariffed since January 1, 2007, so insurers set most premiums themselves, which means lower expenses can in principle reach buyers through competition.

Why UPSC loves this

1. GS3 asks about financial inclusion beyond bank accounts. The syllabus covers inclusive growth and mobilisation of resources, and insurance is both a social-protection tool and a source of long-term savings. Mains answers on financial inclusion are expected to move from bank accounts to insurance and pensions, and this proposal supplies the regulatory detail — commission, expenses, channels — that marks out a strong answer.
2. Prelims tests regulators, their parent Acts and FDI caps. UPSC regularly asks which body regulates which financial sub-sector and what the FDI limits are in sensitive sectors. The 2025 amendment raising the insurance FDI cap to 100%, IRDAI’s composition, the Insurance Ombudsman and the definitions of penetration and density are all Prelims-ready.
3. Regulatory design is a GS2 theme. GS2 covers statutory and regulatory bodies. The swing from product caps to board-set commissions in 2023 and back towards caps now is a live example of the debate between rules and principles in regulation, useful in answers on how regulators balance market freedom with consumer protection.

Analysis

1. Product-wise caps return to micro-management, but for a better reason than before. In 2023 IRDAI gave insurers a single overall expense ceiling and let their boards decide commission within it, on the logic that firms know their costs better than a regulator. The risk of that freedom was that insurers could concentrate payouts on high-margin products and powerful channels, such as bank branches, rather than on products that suit buyers. Linking caps to product, channel and effort ties pay to the work actually done, which is a sounder rationale than the old uniform caps. The counter-view is that price controls on intermediaries shrink distribution where selling is hardest, which is why the proposal adds 10% and 20% top-ups for small towns and rural areas.
2. The structure of life-insurance caps targets the incentive behind mis-selling. A first-year commission of up to 25% for agents on policies with a payment term of 10 years or more, against 6.25% on plans of up to five years, recognises that long-term products take more effort to sell. But front-loaded commission also rewards selling long policies to buyers who cannot keep paying; when such a policy lapses in its early years, the buyer loses most of what he paid while the distributor keeps the first-year commission. The proposal lowers the ceilings but keeps the front-loading. A stronger design would shift more pay into renewal, or trail, commission, so that distributors earn only as long as the policy survives.
3. The glide path squeezes distribution first, and policyholders gain only if competition passes it on. Cutting general insurers’ expense ceiling from 30% to 20% of premium in five years, and life insurers’ to 12.5%, forces insurers to economise, and commission is usually their largest cost. They will push digital and direct sales and renegotiate with banks and brokers. In general insurance, where premiums have been largely market-determined since 2007, lower costs can reach buyers through competition; in life insurance, where products bundle protection with savings, the gain depends on IRDAI scrutinising product pricing so that savings show up as lower premiums or better returns rather than higher margins. The regulator should publish, after two years, whether expense ratios fell and whether premiums or benefits moved.
4. Lower caps on credit-linked insurance address coercion at the loan counter. Insurance sold with a loan is often bought because the borrower fears the loan will otherwise be delayed, not because he compared products. Separate, lower limits — 5% for motor own-damage, personal accident and first-year health cover sold with credit — reduce the lender’s incentive to push its partner insurer’s policy. The counter-view is that credit-linked life cover protects families from inheriting debt, and thinner commission could make lenders less willing to offer it. The balance is to keep the cover available while guaranteeing the borrower’s right to choose any insurer and to buy the policy separately.
5. Cheaper distribution is necessary for ‘Insurance for All by 2047’, but not sufficient. Commission and expenses are loaded into premiums, so lower costs make insurance cheaper for first-time buyers. But under-insurance in India is as much about trust, claim settlement and product complexity as about price. If distributors earn less, some will abandon small-ticket rural policies altogether, and the proposed top-ups may not compensate. The durable route to penetration combines low-cost channels — digital platforms such as IRDAI’s Bima Sugam marketplace, self-help groups and post offices — with simple standard products whose value a buyer can understand without a salesperson.

Administrator's brainstorm