Life insurance is largely sold through intermediaries like agents and brokers who guide customers through product choices, documentation, and servicing.

To compensate these intermediaries, insurers pay commissions linked to the premiums paid by policyholders. These commissions are regulated by the Insurance Regulatory and Development Authority of India (IRDAI), which sets the broad framework within which insurers design their payout structures.

Commissions in life insurance have normally been front-loaded, meaning a large portion of the agent’s earnings comes in the first year when the policy is sold. Renewal commissions are paid in subsequent years but are typically smaller.

Now, the IRDAI is exploring whether this system needs to change.

The current commission structure

Under the traditional model, commissions are heavily concentrated in the first year of a policy.

For many regular premium life insurance products:

• First-year commissions can be as high as 35% of the premium
• Renewal commissions are lower in later years
• Most of the distributor’s incentive is therefore tied to selling a new policy

While this model has helped build India’s vast insurance agent network, it has also raised concerns about whether incentives are aligned with long-term policyholder interests.

Why IRDAI Is considering changing this

The regulator is reportedly discussing a levelled or trail-like commission structure for life insurance policies. Under this approach:

• First-year commissions would be reduced
• Commissions would be spread across the life of the policy
• Agents would continue earning as long as the policy remains active

The aim is to encourage stronger focus on policy servicing and customer retention, not just initial sales.

Policy persistency

One of the most important metrics in life insurance is policy persistency, the percentage of policies that remain active over time. Industry data suggests that persistency falls sharply after the first year:

• Around 67–70% of policies remain active after 13 months
• This drops to 45–49% by the 61st month

Low persistency means policies lapse early, which can hurt both policyholders and insurers.

By linking commissions more closely to long-term policy continuation, IRDAI hopes to improve these figures.

Incentive misalignment?

A recent report titled “India’s One-Hour Insurance Problem” by Upstox highlighted several challenges in the life insurance sales ecosystem. Key findings from the survey included:

• 63% of buyers felt agents prioritised commissions over customer needs
• 63% of customers received less than one hour of explanation before buying policies
• Only 40% of policyholders rated their agents positively

The study also found gaps in product literacy, with many buyers unable to distinguish between common policy types such as endowment plans and ULIPs. These findings have strengthened the argument that incentives should be better aligned with customer understanding and long-term outcomes.

Lessons from the Mutual Fund industry

The idea of shifting away from large upfront commissions is not new. In the mutual fund industry, regulators banned upfront commissions years ago and replaced them with trail commissions paid over time.

Despite initial concerns, the sector continued to grow rapidly, supported by improved transparency and investor confidence.

The IRDAI appears to believe that a similar approach could encourage better customer advice, long-term relationships and more sustainable distribution models

Earlier Regulatory Proposals

This is not the first time such reforms have been discussed. In 2022, IRDAI circulated draft guidelines suggesting:

• Reducing first-year commission from 35% to around 20%
• Increasing renewal commissions to around 10%
• Introducing longevity incentives

Under the longevity proposal, agents could earn additional rewards if policyholders maintained their policies for 5, 10, or 15 years. Although these proposals were not implemented at the time, the latest discussions suggest the regulator is revisiting the idea.

What would such a change mean for insurance intermediaries

If a trail-based model is introduced, intermediaries may see several changes in how they earn:

• Lower upfront payouts when a policy is sold
• Higher income spread across multiple years
• Greater focus on servicing existing clients

For agents and brokers who build long-term relationships with customers, this could actually create more stable and predictable income streams. However, agents who rely heavily on first-year commissions may need to adjust their business models.

Good news for policyholders?

For life insurance buyers, the effects may be indirect but meaningful. If distribution costs fall over time:

• Premium pricing could become more efficient
• Product design could focus more on protection and long-term value
• Agents may spend more time explaining policies and servicing clients

Most importantly, a levelled commission structure could reduce incentives for short-term product pushing.

How this could benefit the Life Insurance industry

A revised commission structure could address several long-standing challenges in the industry:

• Improve policy persistency
• Encourage needs-based selling
• Reduce mis-selling concerns
• Align distributor incentives with customer outcomes

In the long run, this could strengthen trust in life insurance as a financial protection tool, rather than a product primarily sold for commissions.

The discussions around commission reform reflect a broader shift in how financial products are distributed. If implemented carefully, a levelled commission structure could help the life insurance industry move closer to these goals while maintaining a strong distribution network.

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