IRDAI Insurance Reforms Explained: How Proposed Commission Rules Could Lower Policy Costs

There are some plans from IRDAI in relation to changing the commission practices of the insurance companies regarding payments of the same to agents, brokers, banks and other distributors of insurance products. The consultation paper named “Recalibrating Economics of Insurance Distribution” seeks to reduce distribution costs, improve transparency, and create value for consumers. IRDAI has sought comments on this issue till October 25, 2026.

It is important to note that this step is crucial because the commission expenses and other expenses of the distribution of the insurance form part of the overall cost structure of the insurance. The goal of IRDAI in this regard is to regulate such costs which may result in creating some opportunities for lower prices. But it does not imply automatically that premiums will be reduced.

What Has IRDAI Proposed?

Unlike the existing proposal, the framework will allow for product-specific and distribution-specific caps on commissions to be instituted as opposed to using a single cap that applies to all insurance companies. These caps will be influenced by the kind of insurance policy, distribution channel, the size of the insurance policy, and the efforts put into marketing the product.

The difference in the two is very huge. For instance, under this proposed framework, the limit of commission on first-year individual health insurance would be 15 percent for distribution firms and 20 percent for agents, whereas the limits of renewal and portability will be less. This would differ according to the different insurance products.

In the case of life insurance, the limits of commissions to be proposed will be dependent on the premium payment period. In individual life policies where the period of payments is at least 10 years, the first-year cap will be 20 percent for distribution organizations and 25 percent for agents.

Why is IRDAI Targeting Insurance Commissions?

The bigger picture is that of the increasing cost of distribution of insurance and the incentives that arise from commission-based selling. In the proposal made by the IRDAI, it is argued that such a move would help make the insurance distribution process more effective.

This is especially true since the insurance business is conducted with the aid of intermediaries most of the time. The agent, the bank, the broker, among others, would have an influence on the decision making of the consumer when buying insurance policies.

Thus, IRDAI wishes that the economics of distribution promotes the right sale and servicing of the policy.

Could These Reforms Actually Lower Policy Costs?

This may be so, but it is essential not to view lower commissions as an automatic lowering of premium rates.

The logic of IRDAI here is that by spending less on their overheads, the insurers could save on some expenses and, therefore, some of those savings could help the policyholders in the form of reduced insurance costs or better value from the insurance. The regulator has even tied its proposal of reducing Expenses of Management with the goal of bringing down the overall cost of insurance.

But insurers could deploy the savings in other ways too. They might invest the savings back into technology, service, claims management or distribution networks without necessarily reducing the premium rates. As pointed out in Financial Express, there is no guarantee that the insurers would pass on all commission savings to customers.

So cheaper insurance is just one of the possibilities here.

What Will Happen to Insurers’ Expenses?

However, the IRDAI is making proposals for changes not only in the commissions, but also in the total expenses of management of the insurance companies.

In the case of life insurers, the EoM proposal would be to reach 15% in two years’ time, and 12.5% in five years, in relation to gross direct premium income. In the case of general insurers, the IRDAI proposes to move from the current benchmark of 30% based on gross written premiums to 20% of domestic gross direct premium income in five years’ time.

This way, there is gradual adjustment and not immediate change.

How Could This Affect Policyholders?

In the eyes of the consumer, one of the most significant benefits which can be achieved in the future is the increasing transparency in the insurance product sale process.

IRDAI has come up with a new way of approaching the issue of disclosure in regard to the commissions paid to distributors and the problem of mis-selling.

It plans to hold individual sellers accountable by connecting their commission payments to their sales activities and introducing commission clawbacks in cases of mis-selling.

This could be particularly useful for those customers purchasing insurance products for life, health, or investments via agents or banks.

What about the Insurance Linked with Loans?

Another aspect of the proposed changes relates to the insurance products tied to loans.

IRDAI suggests introducing restrictions on mandatory bundling which means that customers cannot be obliged to buy a particular insurance product from a particular company as a requirement for getting a loan.

This framework would imply certain combinations of products which are acceptable to buy together while increasing disclosure of commissions and providing customers with freedom to choose insurance product.

Could Agents and Banks Be Affected?

Yes, the suggested alterations may considerably affect the economics of the insurance product distribution. Insurance commissions represent one of the main sources of revenue for banks, brokers, agents and other intermediaries. Thus, a decrease in the upper limit of commissions may force distributors to rethink their product choices and the amount of investment in customer acquisition.

According to Business Standard, the industry representatives believe that the suggested proposals will negatively affect some existing distribution models for some time, but will improve the economics of the new business in the long term perspective.

Smaller insurers may find it difficult to attract customers if the proposed changes take place, especially if they compete with larger companies that have their own well-established distribution networks.

Will Insurance Become Cheaper Immediately?

No. The proposals are still being discussed; thus, the final set of rules can be different from the suggested one after the feedback from the insurance companies, distributors and other interested parties is obtained.

Even if the upper limit of the commissions and expenses is introduced, the effect on the premium depends on the ability of insurers to change their pricing, distribution expenses and other expenses.

Why These Reforms Matter

The suggested IRDAI framework does more than just bring about a reduction in commissions. It seeks to reorganize the insurance business in India.

The regulator is seeking to tackle distribution costs, commission structures, mis-selling, loans-based insurance policies, disclosures and accountability in a bid to create a market for insurance products that are easy to understand, have sales incentives aligned to their interests and distribution costs well managed.

In case of successful implementation, the reforms would eventually bring a new approach to how insurers, banks, agents and brokers treat their clients.

What Happen Next?

The reform proposals are at present being consulted on. The regulator has sought inputs and suggestions on the proposals until October 25, 2026. Upon receiving the feedback, the regulator may decide to tweak the proposals before bringing out the final regulations.

What this means is that customers should not presume that all commission rates and expense limits suggested in the proposals will be the final regulation.

Conclusion

The proposals for insurance reforms by IRDAI mark an important effort towards re-engineering the economics of insurance distribution in India. With restrictions on commission as well as insurer’s overheads, along with increased protection from mis-selling, IRDAI wants to make the entire insurance process more efficient and transparent.

For the insurance buyer, the greatest possible gain may come through reduction in distribution costs and improved value of insurance, although how much the premium gets reduced will depend on how insurers respond to these changes.

While the IRDAI proposals can help to cut the distribution costs involved in insurance, cheap insurance is only a possibility and not an automatic consequence of these proposals. What may change could be the level of transparency and seller’s incentives.

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