Insurance regulator likely to tighten commission norms

Why in the News?

IRDAI is working on a disclosure framework and a possible commission cap for insurance intermediaries, using powers granted by the January 2026 amendment to the Insurance Act. The move exposes a tension between commission-driven competition for distribution access and policyholder protection, since insurers with largely similar products have long competed on payouts to intermediaries rather than on price. Gross commission outgo across the industry crossed Rs 1 lakh crore in FY25, with the commission expense ratio for non-life insurers rising from 6.21% to 6.86% in one year.

What twin-track regulatory response has IRDAI designed for insurance intermediaries?

1. Disclosure threshold: Intermediaries whose commission income exceeds a prescribed threshold must file detailed annual disclosures with the regulator.
2. Scope of disclosure: Required disclosures cover commission earnings, related-party transactions, profits from operations, and dividend repatriation to promoters or parent entities.
3. Public accountability mechanism: Intermediaries must publish this information on their own websites, not only file it with the regulator.
4. Parallel price-control track: IRDAI is separately drafting a proposal to cap commission payouts by insurers to distributors.
5. Legal basis: The commission cap is enabled by the January 2026 amendment to the Insurance Act, which for the first time empowered IRDAI to prescribe commission ceilings.
6. Sectoral range today: In the non-life segment, commission to brokers currently ranges from 2.5% to 10%, illustrated by the example of a $20 billion fleet airline paying $30 million in annual premium.

Why has commission-driven competition persisted despite calls for policyholder-centric conduct?

1. Product homogeneity: Insurers offer products broadly similar in coverage and pricing, which removes price and product design as competitive levers.
2. Commission as the substitute lever: Intermediaries decide which products to distribute based on commission structures and incentive payouts rather than product merit.
3. Distribution-channel competition: Insurers compete for access to intermediaries, not for the end policyholder, inverting the intended direction of market discipline.
4. Renewal-commission bias: Intermediaries favour products generating recurring renewal commissions, which skews recommendations toward insurer payout structures rather than policyholder need.
5. Persistence of mis-selling: Mis-selling and under-cutting by insurers to secure business continue despite existing disclosure and conduct norms.
6. Digital paradox: Digital platforms, web aggregators and insurtech firms lower customer acquisition costs and raise price transparency, yet this has intensified rather than reduced competition for distribution access.

What does the scale of commission expenditure reveal about the distribution model?

1. Cross-industry threshold breached: Total commission paid by 26 life and 28 non-life insurers crossed the Rs 1 lakh crore mark in FY25.
2. Non-life sector breakdown: Public sector general insurers paid Rs 9,335 crore, private general insurers Rs 30,498 crore, standalone health insurers Rs 7,365 crore, and specialised insurers Rs 67 crore in commission for 2024-25.
3. Non-life aggregate: These four segments cumulatively totalled Rs 47,266 crore in gross commission expense for the entire non-life insurance industry.
4. Life insurance outlay: Life insurers paid Rs 60,800 crore in commission during 2024-25, exceeding the entire non-life industry’s commission outgo.
5. Rising commission expense ratio: The commission expense ratio, measured as commission expenses as a percentage of premium, rose from 6.21% in 2023-24 to 6.86% in 2024-25 for non-life insurers.
6. Direction of the trend: The ratio moved upward in the same year IRDAI issued its consultation paper, indicating the disclosure-stage proposal has not yet altered underlying commission behaviour.

What precondition is missing for a commission cap to correct mis-selling rather than relocate it?

1. Non-cash incentive channels: Insurers currently offer performance-linked incentives and other commercial benefits alongside commission, none of which a commission cap alone would touch.
2. Undefined enforcement mechanism: The consultation paper details disclosure content but does not specify how breaches of a future commission ceiling would be monitored or penalised.
3. Distribution-channel dependence unaddressed: A cap constrains payout levels but does not remove insurers’ underlying dependence on intermediaries to reach policyholders in a product-homogeneous market.
4. Threshold design gap: The disclosure obligation applies only above a prescribed commission-income threshold, leaving intermediaries below that threshold outside the enhanced-disclosure regime.
5. No linkage to policyholder outcomes: The proposed framework tracks intermediary earnings and related-party transactions but does not tie disclosure or caps to policyholder complaints or mis-selling data.

Will a commission cap eliminate the incentive to mis-sell or merely shift it to non-commission channels?

1. Incentive substitution risk: Insurers can replace capped commissions with performance-linked incentives, trips, or other non-cash benefits to retain intermediary loyalty.
2. Disclosure without a cap has not worked: The consultation paper preceded the cap proposal by weeks, and the commission expense ratio still rose in the same reporting year.
3. Cap without enforcement detail: IRDAI has not yet formally proposed a cap, and the reported draft carries no disclosed enforcement architecture.
4. Underlying driver untouched: Product homogeneity, the root cause of commission-based competition, is not addressed by either disclosure or a cap.
5. Segment disruption acknowledged: The article itself notes a commission cap “could disrupt the segment,” indicating the regulator anticipates displacement effects on distribution economics rather than a clean resolution.

Conclusion

IRDAI’s shift from disclosure norms to a commission cap signals that transparency alone has not corrected commission-driven mis-selling in a market where product homogeneity leaves commission as the primary competitive lever. Unless the cap is paired with enforcement against non-cash incentive substitutes, it risks displacing rather than eliminating the underlying incentive to compete for distribution access at the policyholder’s expense.