Insurance sales rules are about to change
India’s insurance sales sector has a structural paradox at its heart and IRDAI is trying to solve it.
Between FY23 and FY25, the Indian life insurance corporate agency channel saw new business premium grow by 28%. Distributor remuneration, however, grew by 125% over the same period. Remuneration is now growing four to five times faster than the actual business being generated!? The number of individual life insurance policies in force has remained broadly stagnant over the last decade. Insurance penetration sits at 3.7%, against a global average of 7.3%, and has not materially moved despite years of premium growth.
The RBI’s Financial Stability Report of December 2025 described the insurance sector’s apparent stability as masking “emerging structural pressures.” The Economic Survey 2025-26 was more direct, calling out escalating acquisition costs, high operating expenses, and heavy dependence on expensive intermediary networks as structural constraints that are “limiting inclusion, eroding consumer value, and weakening long-term stability of the sector.”
TLDR; insurance premiums are growing, commissions are growing faster, and the number of people actually covered is barely moving. That is the problem IRDAI’s consultation paper on distribution reforms (late September 2026) attempts to address.
The commission problem
To understand these proposed reforms, you need to understand what happened in 2023.
Prior to 2023, IRDAI set separate commission caps for different insurance products. That year, it replaced these product-wise limits with a single broader ceiling called Expenses of Management (EoM), the total percentage of premium an insurer could spend on commissions, operating expenses, and other distribution costs. The intent was to give insurers flexibility, let competition work, and eventually pass efficiency savings to policyholders.
What happened instead was a race to the top on commissions. Insurers competed aggressively for distribution channels by offering higher payouts. Effective commissions on savings products reached 29–60% of first-year premium in some cases, and exceeded 65% in individual transactions. Group Credit Life products sold through NBFC channels averaged 42% effective payouts, despite customers at the point of loan origination having “limited opportunity to compare products.” Some insurers breached their permitted EoM limits entirely.
The 61st month persistency rate in life insurance (the share of policies still active after five years) is just 48%. More than half of life insurance policyholders are discontinuing before completing five years, despite the insurer having paid out heavily frontloaded commissions to acquire them. This is proof that the “sales” forces as work (be in agents, brokers, banks or NBFCs) have lost sight and ceased to care about the policyholders and are instead focused on short-term premium procurement.
Five major changes proposed
- Simplify the distributor architecture: Currently, insurance is distributed through a maze of separately regulated entities: individual agents, corporate agents, brokers, web aggregators, bank assurance channels, NBFC channels, and more. The paper proposes consolidating these into three types: Insurance Distribution Enterprises (IDEs), Insurance Distribution Persons (IDPs), and Market Infrastructure Institutions (MIIs). This is designed to eliminate regulatory arbitrage, where some channels exploit structural differences to operate at lower compliance cost.
- Reduce the EoM limit: For life insurers, the EoM cap would come down to 12.5% of Gross Direct Premium Income. For general insurers, from the current 30% to 20% over five years. This directly reduces the pool available for commissions and operating expenses. Some insurers currently running at 22-39% Cost of Doing Business (excluding the two largest, which run at 10-12%) will feel this sharply.
- Reintroduce commission caps: Proposed limits include: health insurance first-year commissions capped at 15% and renewals at 5%; motor third-party (mandatory) insurance commissions reduced to near-zero. Credit-linked insurance (where commissions currently are 45% of premiums!) faces the most significant proposed reduction.
- Commission transparency & claw-back: Insurers and distributors with large policy volumes would be required to publish commission policies publicly. For policies with sum insured above ₹50 crore, the commission must be disclosed on the policy itself. If a sale is subsequently found to be mis-selling, commissions can be clawed back, creating a financial disincentive for bad conduct.
- Digital infrastructure: The paper positions Bima Sugam and a new Public Insurance Registry (PIR) as pull-based alternatives to commission-driven distribution. The vision is that customers can compare products, check the performance of insurers and distributors, port policies, and manage claims, all by themselves.
The impact
The impact on distributors is significant. Policybazaar and Turtlemint stocks fell 30% or more the day after the paper was announced, a signal about how seriously the industry reads these proposals. The IBAI (Insurance Brokers Association of India) considers the changes to be an existential threat to the broking industry. The proposals do make us wonder: are policyholders, on their own, equipped to understand and handle selection of the right cover, the formalities of policy administration and claiming from insurers without the assistance of intermediaries?
For insurers, reduced EoM limits constrain the commission war that has been their primary competitive strategy for distribution. That may improve underwriting discipline but could also reduce their ability to expand into hard-to-reach markets without the pull of commission incentives.
For policyholders, the picture is more complex than “lower commissions = lower premiums.” When an insurer reduces distribution spend, those savings can:
- be reinvested into better policy returns and claim outcomes;
- be retained as margin;
- free up capacity to price more competitively for new segments.
Which of these actually happens will depend on competition and further guidelines from the IRDAI.
The paper is also transparent about a genuine concern: reducing distributor incentives in India’s under-penetrated rural and semi-urban markets risks reducing the motivation to reach those markets at all.
The paper attempts to address this by proposing higher commission allowances for distribution in underserved areas.
These proposals are not yet law. IRDAI has invited public comments from industry stakeholders, consumer advocates, and the general public through October 2026. What emerges from that process could be different from what has been proposed.
But IRDAI’s direction is clear. It intends to move from a system where insurance distribution is primarily shaped by commission competition, to one which is shaped by customer outcomes.
As a policyholder, that means the pressure on your agent or broker to sell you the most commission-generating product should reduce. The information available to you about what you are being sold should increase, thus decreasing chances of misselling.
What exactly changes be known in the next few months.
But whether the proposed changes payoff might take years to know.
Will these changes, if implemented, to the way insurance is sold pay off positively? Or will the industry revert, swinging the pendulum to the other prior extreme, which once caused IRDAI to change the rules in 2023? Time will tell. Or perhaps a lesson from other economies will?
This blog post is brought to you by the minds at insurancepe!
Got questions or doubts about anyone insurance?
Need advice or help understanding your insurance needs?
Want the best bang for your buck when buying insurance?
We got you!
Reach out to us at:
Whatsapp/Phone: 89779 18030
E-mail: contact@insurancepe.com
Visit us at www.insurancepe.com
