In sweeping reforms to insurance distribution, the Insurance Regulatory and Development Authority of India (Irdai) on Wednesday proposed specific caps on insurance commissions based on segment, line of business, distribution channel, product complexity and the effort involved in selling and servicing the product.
The much-anticipated consultation paper, “Recalibrating Economics of Insurance Distribution”, has also proposed significantly lowering the overall expense limits for insurers with a glide path to reduce their commissions and management expenses.
For individual non-linked (participating or non-participating) and unit-linked plans with a policy term of up to five years, the first-year commission for agents is capped at 6.25%, while it is capped at 5% for other distribution entities including corporate agents, brokers, composite brokers among others. Renewal commissions are capped at 2% for agents and 5% for distribution entities.
For life insurance policies with a term of 10 years and above, the first-year commission for agents is capped at 25%, followed by 5% in renewal commissions. Distribution entities will be allowed a commission of 20% in the first year and 3% on renewals.
To improve persistency, the renewal commission will increase by 0.5% of the premium once every three years from the beginning of the sixth policy year. The commission will be 5.5% for renewals in the sixth, seventh and eighth policy years, 6% for the ninth, 10th and 11th years and so on, subject to a maximum renewal commission of 7%.
In health insurance, the first-year commission on individual health policies is proposed at 15% for distribution entities, 20% for agents and associates and 5% for hospitals. Renewal commission will be capped at 5% of the premium for distribution entities and 10% for agents and associates.
In 2023, Irdai removed the commission cap on insurance policies. The Expense of Management (EoM) guidelines set an overall expense limit of 30% of gross premium written for general insurers and 35% for health insurers, covering commissions and other operating expenses.
”The 2023 and 2024 framework relies heavily on Board approved commission policy,” Irdai said, adding that in practice, Board approval has often been a formality rather than being substantive. “The inability to exercise adequate cost discipline under the flexible EoM regime makes a compelling case for hard caps on commissions within revised EoM limits, stringent implementation, and enhanced regulatory oversight.”
According to Irdai, for individual life insurance products such as pure term, participating, non-participating savings and linked products, the average commission among insurers ranged from 14% to 51% of the first-year premium. The maximum commission ranged from 33% to 81%.
For life insurance products, the average commission paid to agents and corporate agents, including banks and other entities, ranged from 27% to 61% of the first-year premium, while the maximum commission ranged from 34% to 92%. These two distribution channels collectively account for approximately two-thirds of total life insurance business.
For credit life insurance products, which are relatively low-effort products as pure-term insurance is typically bundled with loans for housing or motor vehicles, the average commission paid to lending banks ranged from 5% to 41%. The commissions paid to lending NBFCs ranged from 7% to 47%.
Irdai also found that the average commission on general insurance products, including motor, health and property insurance, ranged from 6% to 29% of the premium. At the same time, the maximum commission paid by insurers ranged from 32% to 93%.
For general insurance companies, the average commission paid to agents and brokers ranged from 17% to 18%, while the maximum commission paid to these categories of distributors ranged from 66% to 80% of gross premium. These two distribution channels collectively account for almost two-thirds of the total general insurance business.
Irdai has also proposed a phased recalibration of the Expense of Management (EoM) framework through lower limits and a phased glide path. For life insurers, the EoM limit would move to a company-level basis linked to Gross Direct Premium Income (GDPI), with the limit proposed at 15% within two years and 12.5% within five years.
For general insurers, the basis would shift from Gross Written Premium (GWP) to domestic Gross Direct Premium Income (GDPI), with the EoM limit reducing from 30% of GWP to 20% of GDPI within five years, through progressive annual reductions.
Irdai said the proposed reduction in EoM is intended to lower the overall cost of insurance, thereby expanding the risk pool available in general insurance and enhancing returns to policyholders in life savings products.
The proposal is open for comments and suggestions from the public and all stakeholders till October 25, 2026.