The insurance regulator is right to worry about the high cost of selling insurance, but its proposed remedy marks a sharp reversal. In 2023, the Insurance Regulatory and Development Authority of India (IRDAI) moved away from product-level commission controls, allowing insurers greater freedom within overall expense limits. It now proposes granular caps by product and channel, alongside tighter company-level expenses of management: 15% of gross direct premium income for life insurers within two years, falling to 12.5% in five, and 20% for general insurers.
Non-cash benefits would face closer scrutiny, volume-linked incentives for bank and non-banking financial company employees would be barred, and commissions could be clawed back in cases of mis-selling. The objectives are sound. Yet the test should not be whether distributor payments fall, but whether insurance becomes better value and more accessible for policyholders across the country.
IRDAI has good reason to intervene. Insurance remains dependent on push-based distribution, with large upfront rewards encouraging sellers to chase transactions rather than suitability or long-term service. The regulator’s consultation paper shows why the experiment with flexibility disappointed: between FY23 and FY25, new-business premiums for a sample of corporate agents rose 28%, while total distributor remuneration surged 125%. Corporate distributor payouts reached nearly 27% of first-year premiums, supplemented in some cases by substantial rewards.
Such costs erode the value accumulated in long-duration savings policies and leave customers with poor surrender values when they exit early. Aligning commissions with premium-payment terms, renewals, and persistency could discourage churn and reward intermediaries for keeping policies in force. The proposed action against dark patterns, individual seller identification, and audits of large distributors should also strengthen accountability.
The industry’s objections, however, cannot be dismissed as mere self-interest. Insurance is still largely sold, not bought, particularly outside affluent urban markets. Explaining a complex, multi-year product and servicing it afterwards requires effort, and capable intermediaries must be paid adequately. Smaller insurers without captive bank networks or large agency forces may need to spend more to acquire customers; rigid caps could therefore entrench incumbents.
Low-premium and rural products may become less attractive to agents, weakening penetration where it is already poor. Digital aggregators also argue that upfront commissions finance technology, marketing, and comparison tools, and that steep reductions could damage their economics. Having first micromanaged commissions and then granted broad autonomy, another abrupt swing risks regulatory uncertainty. IRDAI should use the consultation process to calibrate caps by product complexity, ticket size, geography, and service requirements rather than impose a blunt, uniform restraint.
Most importantly, lower commissions do not automatically benefit customers. A rupee no longer paid to an agent, bank, or platform can just as easily become additional insurer profit as a lower premium or better policy value. Cost controls must therefore be accompanied by comparable disclosures, by product and channel, of acquisition costs, persistency, surrender outcomes, claims, and complaints.
Insurers should demonstrate how savings in distribution expenses improve protection or returns. Remuneration should shift gradually from the point of sale towards renewals, continuing service, and suitable outcomes, while preserving incentives for last-mile distribution. Commission caps can correct excesses, but they are only a means. The ultimate measure of this reform is whether more of every `100 paid by a policyholder finances protection and savings, fewer customers are mis-sold unsuitable products, and insurance reaches more Indians — not whether distributor margins or insurer costs are merely trimmed on paper.