The timing of the proposed rejig of distribution economics by IRDAI (Insurance Regulatory and Development Authority) is interesting as it came six months after India allowed centum foreign ownership in the sector.
IRDAI is re-engineering the financial metrics of distribution — axing expenses of management (EoM) limits, tightening commission and moving towards a more technology-driven distribution architecture as the regulator now feels sector has become “high cost and commission-led”.
Proposing a phased reduction in EoM limits, the IRDAI, in its consultation paper, “Recalibrating Economics of Insurance Distribution,” said that for life insurers, the ceiling will move to 15% of gross direct premium income (GDPI) within two years and 12.5% within five years from the present 30-35% levels.
General insurers would see the benchmark shift from gross written premium to domestic GDPI, with the ceiling trending towards 20% within five years against 32.1%.
The timing makes the policy sequence worth examining. India first removes the ownership ceiling, then it starts addressing the distribution-cost structure. Foreign investor interest has already increased. IRDAI chairman Ajay Seth had said in June about “significant” interest from foreign promoters seeking 100% ownership.
The country’s insurance sector saw the foreign direct investment (FDI) limit move to 100% from 74%, with the new framework coming into force this February.
Foreign interests are understandable as India’s gross premium was ₹11.93 lakh crore in FY25, but penetration was only 3.7% of GDP, implying substantial room for growth.
Questions arise as to whether the proposed EoM/commission structure treats new insurers and established players differently during the transition period. That could determine whether it is merely a broad efficiency reform or does it materially alter the competitive entry equation.
IRDAI proposes simpler registration, significantly lower entry and capital requirements, reduced regulatory fees and greater flexibility for distributors to undertake insurance as well as other financial and non-financial activities, thus expanding avenues for business diversification and revenue generation and allowing people in relatively small markets to also venture into insurance business.
Cost curve
Justifying the proposal, IRDAI indicates that distributor commissions have risen sharply, with additional payments such as promotional costs, brand fees and rewards adding substantially to base commissions.
According to the reports, the commission ratio in the public life insurance sphere was 5.18% in FY25, while it was higher at about 9% in the private sector.
Bancassurance is notably expensive: according to reporting on the consultation paper, banks account for nearly 45% of private life insurers’ premiums, while total payouts in some multiple-bank deals can be extremely high.
Highlighting that commissions outran premiums by two to eight times, the IRDA paper said that in the two years since the 2023 reforms, motor insurance through brokers saw commissions surge 259%, while premiums grew just 34%. That’s nearly eight times faster.
Life corporate agents saw a similar pattern as commissions jumped 125% on 28% premium growth, with payouts now accounting for about 27% of first-year premiums.
Across general insurance, the average broker commission doubled to 17% of premium cover. Motor third-party average commission surged from 4.3% to 22%.
For a foreign-owned insurer, a fall in distribution inefficiencies could change the competitive dynamics because the pressure is greatest in private life insurance (due to expensive bancassurance and agency expansion), health insurance (due to intermediary-heavy sales), and new entrants (as they need customer acquisition scale).
Juggling act
Going by the proposals, insurance distribution is seen more as a juggling act: expand penetration, cut acquisition costs and go digital, without dropping distributor incentives.
The IRDAI’s proposals, which have come at a delicate juncture, are an attempt to move India’s insurance industry from an intermediary-led model to a more transparent, differentiated and digitally enabled distribution architecture.
The consultation paper also proposes changes to digital distribution and customer protection. The reforms assume significance, as insurance distribution is heavily intermediary-dependent, even as digital and insurtech channels expand.
Although it does not curb bancassurance, the greater concern is economics, as IRDAI wants to prohibit volume-linked or reward-linked incentives for bank and NBFC employees selling insurance, while bringing direct and indirect remuneration within the commission framework.
Banks are among the most important corporate-agent channels, with 237 banks among 661 being active corporate agents as of March 2025.
The proposals could make aggressive cross-selling less attractive. Banks may consequently prioritise products with better economics or stronger customer relevance.
However, the bancassurance model has structural advantages — branch reach, customer data and established relationships and embedded — so lower commissions do not automatically make the channel unviable.
Nevertheless, for insurtechs and fintechs, the impact could be double-edged. On the positive side, lower traditional distribution costs could potentially improve the financial metrics of digital acquisition. Insurtechs that can sell, underwrite, and service policies digitally could benefit as insurers seek lower-cost channels. India already has 150-plus active insurtech players, with aggregate valuations above $15.8 billion and revenues of about $0.9 billion in 2024, according to Boston Consulting Group.
IRDAI is also proposing Market Infrastructure Institutions (MIIs) for insurance, with Bima Sugam envisaged as a digital, pull-based distribution infrastructure, reducing dependence on individual intermediaries and creating new opportunities for technology providers.
However, fintechs that depend heavily on commissions, lead generation or embedded insurance could face pressure. The proposed ban on dark patterns, mandatory suitability and customer-needs documentation, commission disclosure, seller-level identification and clawback of commissions in cases of mis-selling raise compliance costs.
For customers, the intended benefits are lower distribution costs, greater transparency, less forced bundling, better product suitability and potentially more competitive pricing.
The insurance regulator is also replacing a more uniform commission framework with limits differentiated by product, distribution channel, complexity and effort involved.
The interim risk is that if commissions are cut too sharply, insurance penetration could suffer, because India’s market still depends heavily on intermediaries for customer education and trust-building. Even otherwise, the country’s insurance penetration level of 3.7% (2.7% for life and 1% for non-life) is below the global average of 7.3%.
The proposed reset is positive for policyholders and digital platforms, but its second-order effect may be to make India’s fully liberalised insurance market more contestable for global capital.
