IRDAI plans to cut insurer costs: What changes for commissions, premiums & policyholders?

Insurance Distribution” which outlines a comprehensive framework of reforms that address insurance distribution, its structure, costs, commissions, market conduct, transparency, and utilising digital infrastructure. 

“The primary aim is to foster a customer-centric, competitive, efficient and transparent distribution ecosystem, while enabling better and sustainable outcomes for policyholders, insurers and distributors,” said IRDAI.

If you already hold an insurance policy, the proposed changes do not alter its terms today. The consultation focuses on how insurance is distributed, including commissions, transparency and safeguards against mis-selling. 

For existing policyholders, coverage, benefits and other terms continue to be governed by the policy. The proposals are therefore more relevant to how insurance is sold and serviced than to policies already in force.

“Distribution economics matter more for products where the premium is small, but the effort involved in selling and servicing the policy is relatively high. This is relevant in smaller cities and rural areas, where reaching customers can involve higher distribution costs,” according to Adhil Shetty, CEO, BankBazaar.  

“India’s overall insurance penetration was 3.7% in FY2024-25, highlighting the broader need to expand insurance coverage. The proposed framework recognises the additional effort involved in underserved markets by providing additional commission limits for business from smaller cities, small towns and rural areas,” Shetty further added.

Will lower insurance costs mean cheaper premiums for policyholders?

Lower distribution costs create room for better customer value, but the pass-through will not be one-for-one. 

“In competitive products such as term and motor insurance, consumers could see benefits relatively quickly through pricing and product enhancements. In health and long-term savings products, the gain is more likely to emerge through slower premium inflation, lower charges and improved policyholder returns over time,” said Ramkumar Subramanian, Partner, Grant Thornton Bharat. 

“Lower distribution expenses mean lower cost of customer acquisition and may create greater capacity for customer value. However, unlike a GST rate reduction, which can directly affect the amount payable, changes in distribution commissions do not necessarily translate into an immediate reduction in premiums,” commented Debashish Banerjee, Partner, Deloitte India. 

Insurance pricing is influenced by multiple factors, including product benefits, expected returns, long-term inflation assumptions, investment income, claims experience, reinsurance costs, and market competition. As a result, any customer benefit arising from lower distribution expenses is likely to emerge over time and may vary across products, distribution channels, and insurers.

Will lower commissions change how agents sell insurance policies?

A reduction in upfront commissions could gradually shift distributor focus towards products that offer stronger renewal income and long-term customer retention. 

While this may promote persistence and more sustainable business economics, it is important that product recommendations remain driven by customer needs rather than changes in compensation structures.

Lower commissions in products such as health and term insurance have the potential to reduce the overall cost of distribution, but consumers should not assume that every rupee of savings will immediately translate into lower premiums. 

“Insurers are likely to balance multiple priorities, including strengthening margins, investing in technology and service capabilities, improving claims experience, and maintaining profitability in competitive segments. Over time, in product lines with strong competition and transparent pricing, a meaningful portion of the savings should find its way back to customers through better pricing, enhanced benefits, or improved value propositions,” said Subramanian. 

The ultimate beneficiary of the reforms will depend on how market competition evolves and how effectively insurers are able to convert lower acquisition costs into sustainable operating efficiencies.

“Strategically, the framework could shift distribution economics from policy issuance towards lifetime customer value. Greater emphasis on renewal income may encourage persistence, servicing, and retention rather than maximising first-year volumes,” as per Banerjee.  

“At the same time, distributors may redirect effort towards products, other financial instruments or segments based on overall commercial viability. Insurers may therefore need strong product-governance, direct channels, simpler to understand products and suitability frameworks to prevent remuneration differences from narrowing customer choice,” Banerjee further added.  

Hence, the real test will be whether incentives improve portfolio quality without weakening advice or access. Certainly, at least for mandatory products,  the onus will be more on the customers now, potentially supporting greater adoption of digital channels.

Will new commission rules affect existing insurance policyholders?

The proposed reforms are fundamentally about correcting distribution economics, not rewriting insurance contracts. 

“For policyholders who already hold a policy, benefits, coverage and policy conditions generally remain intact. The more meaningful impact is likely to be on future product pricing, distributor incentives and customer acquisition models,” according to Subramanian. 

If insurers realise sustained cost savings, consumers may benefit over time through better value propositions, but any transmission to premiums is unlikely to be immediate or automatic.

Competitive market dynamics may result in some benefits being passed on to customers, although the extent, form, and timing are likely to vary across products and insurers. From a policyholder perspective, the most relevant outcome may be the overall value proposition, encompassing price, coverage, and service, rather than a uniform reduction in premiums.

“Typically, policy terms are difficult to change retrospectively. Therefore, for existing policyholders, premiums and benefits may continue to be governed by the terms of their existing policies. However, the final directive and transition provisions will determine how legacy products, renewals, and servicing arrangements are treated,” stated Banerjee.  

Over time, greater renewal-linked remuneration may strengthen persistence management and post-sale engagement, potentially improving servicing. Insurers and regulators will nevertheless need clear communication and careful product-level implementation, so customers do not interpret distribution reforms as an automatic change in existing premiums, benefits, or renewal costs.

Could lower commissions hurt insurance sales in rural India?

While lower commissions can improve cost efficiency and policyholder value, regulators and insurers will need to balance this against the economics of last-mile distribution. 

“If distributor incentives fall too sharply, complex and low-premium products may receive less attention in rural and semi-urban markets, potentially affecting the pace of insurance penetration and financial inclusion,” stated Subramanian. 

Tighter commission norms combined with stricter Expense of Management (EoM) limits are likely to push insurers towards technology-led distribution and operating efficiency. 

While some distribution costs will come under pressure, sustainable benefits for policyholders will depend on how effectively insurers reinvest those savings into better service, claims experience and product value rather than treating them purely as margin expansion opportunities.

The intent of the paper appears to be not only to drive distribution among existing customers in urban areas, but also to reach underserved markets and new-to-insurance policyholders in the hinterland. The central issue, however, is whether remuneration remains sufficient to support the higher costs of customer awareness, documentation, and servicing in these markets. 

“The additional commission headroom of 10-20 percent signals recognition of this challenge, but geography alone may not determine success. Incentives that encourage agents and distributors to focus on these areas, the use of customer data to identify catchment areas in Tier 2 and Tier 3 markets, adequate pricing, and relevant products will continue to be important factors in improving insurance penetration in the country,” according to Banerjee.

What could tighter commission and EoM limits mean operationally?

Taken together, tighter commission and EoM limits represent an operating model reset, not merely a cost-reduction exercise. 

“Insurers will need to redesign distribution, automate routine activities, improve data-led servicing, and determine which interactions require human advice. Technology can reduce friction and acquisition expenses, but indiscriminate cost-cutting could weaken customer support or inclusion,” stated Banerjee.  

While insurers will need to adapt their operating models accordingly, it is also important to recognise that excessive regulatory intervention, particularly very restrictive caps, may reduce flexibility for market participants. 

The challenge will be to establish appropriate guardrails and monitoring while preserving competition and innovation, so that the framework does not inadvertently contribute to greater market concentration or create conditions that favours oligopolistic outcomes over time.

Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions. 

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