IRDAI Chairman Says Commission Caps Could Start January or April 2027; Distributor Stocks Fall Up to 36%

The news

Mumbai. The Insurance Regulatory and Development Authority of India (IRDAI) expects insurers to pass on the savings from lower distribution commissions to policyholders, through lower premiums, better returns or better claim payouts, its chairman Ajay Seth told The Economic Times in an interview. This follows this magazine’s card of September 24; what is new is the mechanics, the likely start date and the market reaction. The consultation paper, titled ‘Recalibrating Economics of Insurance Distribution’, was issued on Wednesday, September 23. Comments are due by October 25. Draft regulations, also open to comment, will follow. “One possibility is to implement the framework from January 1, 2027, or from April 1, 2027,” he said. Mr. Seth said the first-year commission on new business goes “as high as 40% to 50%”, while there is “hardly any” for persistency, meaning keeping a policy in force. Of the grievances IRDAI receives, “a good 40% to 50%” fall under unfair business practices, and many of these involve mis-selling, the sale of a policy that does not suit the buyer. The paper proposes lower first-year commissions, with more paid as the policy is renewed. A public insurance registry would publish product, grievance and claims records so customers can “know your distributor”. Lenders would be barred from making insurance compulsory with a loan unless the bundle offers a demonstrable benefit to the borrower. Commission limits would cover all payments to distributors. Mr. Seth named as a dark pattern (a design that pushes a buyer into unintended choices) making customers give a phone number and waive curbs on promotional calls to get a quote. Expense ratios, he said, fell from above 20% to about 16.5% in life insurance and from about 30% to 25% in general insurance, then rose again to above 20% and about 32%. The Indian Express reports the proposed first-year life-insurance cap at 20% of premium for distributors and 25% for agents, less than half current levels; IRDAI had removed caps in 2023. Expenses of management would be cut, over five years, to 12.5% of gross direct premium for life insurers and 20% for general insurers, with limits for 2028-29. CareEdge Ratings says 20 of 22 life insurers and 28 of 31 general insurers exceed those limits today. IRDAI found that premiums from general-insurance brokers rose 37% between 2022-23 and 2024-25 while their commissions rose 173%. PB Fintech, which owns Policybazaar, fell 36% on Thursday and 3% on Friday. TurtleMint fell 20% on each day. HDFC Life and ICICI Prudential Life are down 4-5%. JM Financial says insurance income has risen from 3.5% to 5.1% of banks’ profit before tax between 2022-23 and 2025-26. ET reports that distributors will ask whether the caps apply to renewals of existing policies; PB Fintech earned ₹6,089 crore of its ₹6,794 crore operating revenue in 2025-26 from insurance commissions, ₹935 crore of it from renewals. Jefferies estimates a 10% cut in new-business commission could reduce such distributors’ earnings by 10-12%. For individual health policies the proposed first-year cap is 15% for distribution entities and 20% for agents, with renewal and portability commissions of 5% and 10% respectively. The syllabus link is GS3 on financial inclusion and regulation.

Static syllabus linkage

1. The Insurance Act, 1938 still contains the legal hooks on commission and expenses. The Insurance Act, 1938 is the parent law for insurance business in India. Section 40 prohibits payment of commission or remuneration for soliciting business to anyone other than a licensed agent or intermediary, and after the Insurance Laws (Amendment) Act, 2015 the limits on commission are set by IRDAI regulations rather than written into the Act. Sections 40B and 40C deal with limits on expenses of management in life and general insurance respectively. Expenses of management (EoM) cover all operating costs of an insurer, including commissions, charged against premium income.
2. IRDAI is a statutory regulator created by the IRDA Act, 1999. The Insurance Regulatory and Development Authority Act, 1999 followed the report of the Malhotra Committee (1994), which recommended opening the sector to private insurers and creating an independent regulator. The Authority has a chairperson, whole-time members and part-time members appointed by the Central Government. Section 14 lays down its duties, which include protecting policyholders’ interests, regulating intermediaries and specifying the code of conduct for agents. Its headquarters is in Hyderabad.
3. Bancassurance and intermediary categories determine who sells insurance. Insurance reaches customers through individual agents, corporate agents (mostly banks and NBFCs, which is called bancassurance), brokers, web aggregators, insurance marketing firms and direct sales. A corporate agent sells the products of the insurers it has tied up with, while a broker represents the customer and can place business with any insurer. Mis-selling usually arises where the seller has power over the buyer, as when a bank links a policy to a loan, or where the commission is higher than the value of the advice given.
4. Insurance for All by 2047 sets the policy goal the caps are meant to serve. IRDAI has adopted the goal of ‘Insurance for All by 2047’, meaning every citizen should have life, health and property cover by the centenary of Independence. Insurance penetration (premium as a share of GDP) in India remains low by international standards, and density (premium per person) is lower still. The regulator’s reforms since 2023, including the use-and-file product approval system and Bima Sugam, an online marketplace, were designed to raise penetration. The commission proposals are an admission that the earlier deregulation raised distribution costs faster than it widened cover.

Why UPSC loves this

1. GS3 asks about financial inclusion and the cost of financial products. UPSC has asked about insurance penetration, the role of IRDAI and schemes such as PM Jeevan Jyoti Bima Yojana and PM Suraksha Bima Yojana. A question on why insurance penetration remains low despite private entry would use this card’s data on distribution costs directly.
2. Regulatory design is a recurring Mains theme. Questions on whether regulators should rely on principles or on hard caps, and on the risk of regulatory flip-flops, fit this case. IRDAI moved from caps to board-approved policies in 2023 and is now moving back. That makes it a clear example of regulatory sequencing.
3. Consumer protection and information asymmetry run across GS3 and GS4. The principal-agent problem, in which the seller knows more than the buyer and is paid by a third party, is a basic concept of economics. Ethics papers use mis-selling as a case study on professional integrity and the duty of care.

Analysis

1. The 2023 deregulation failed because the ceiling was set on the insurer, not on the incentive. In 2023 IRDAI let insurers set commissions through board policy within an overall expense limit. The theory was that competition would keep costs down. In practice, insurers competed for access to large distributors, especially banks, and paid more to get it. That is why broker commissions rose 173% on 37% premium growth. An overall limit does not stop an insurer from spending heavily on sales and saving elsewhere. Mr. Seth’s own figures, with life expenses back above 20% and general above 32%, show that the flexibility was used for distribution, not for policyholders.
2. Paying more for persistency is the key idea, and front-loaded commission is the real problem. A 40-50% first-year commission pays the seller for the sale and almost nothing for whether the policy survives. This is why mis-selling happens: the agent has been paid before the customer discovers the product does not suit him. Moving money from the first year to renewals lines up the seller’s income with the customer’s interest. It is a better tool than a flat cut, because it rewards distributors who sell suitable products and penalises churn.
3. The market reaction is a measure of how much of the business depended on high commissions. PB Fintech earns about 90% of its operating revenue from insurance commissions, and banks now earn 5.1% of their profit before tax from insurance. A 36% fall in one day shows how much of these firms’ value rested on current commission levels. That does not make the caps wrong. Distributors will argue that online platforms have higher customer-acquisition costs and improve price comparison, and the ET editorial accepts that effects will differ by model. IRDAI can meet part of this by setting different caps by channel and product, which the paper already does, and by deciding clearly whether the caps apply to renewals of old policies. Applying them backwards would undermine contracts and invite litigation.
4. The public registry could matter more than the caps. Caps can be avoided through side payments, which is why Mr. Seth says limits must cover all payments and why related-party deals will be watched. Disclosure is harder to avoid. If a customer can see which distributors have high complaint rates and which insurers settle claims quickly, competition starts to work on quality. The registry’s value depends on the data being complete, timely and simple enough for an ordinary buyer to use.
5. Whether policyholders gain depends on IRDAI enforcing the pass-through. Mr. Seth says savings must reach policyholders through lower premiums, better returns or better claims ratios. There is no automatic mechanism for this. Insurers could keep the savings as profit. IRDAI will need to publish expense and claims data by insurer and product so that the pass-through can be checked. Otherwise the reform will move money from distributors to shareholders of insurers. The ET editorial’s warning that industry will seek to dilute the proposals is realistic, and the regulator’s credibility depends on how much of the design survives the consultation.

Administrator's brainstorm