IRDAI's big insurance reset and the war of words it has triggered

The Insurance Regulatory and Development Authority of India (IRDAI) wants to put tighter limits on commissions paid to insurance agents, brokers and other distributors.Its two-part consultation paper, ‘Recalibrating Economics of Insurance Distribution’, proposes product-wise commission caps, tighter limits on insurers’ Expenses of Management (EoM) and greater scrutiny of how distributors sell and service policies.The proposals have set off a fight with the insurance industry.Brokers say the rules could hurt businesses that spend heavily on advice and servicing, while consumer advocates argue that the existing system has allowed commissions to grow without enough accountability for what happens to policyholders after a sale. India Today Digital has reported extensively on how mis-selling has plagued the insurance industry, from customers being sold unsuitable policies to policyholders struggling when it comes time to make a claim. The question now is whether IRDAI’s proposed changes can address those problems without making insurance distribution more difficult or expensive.In this article, we look at what IRDAI is proposing, why the industry is pushing back, what consumer advocates want changed and, most importantly, what it could mean for policyholders.DECODING IRDAI’S INSURANCE RESET PROPOSAL IRDAI’s concern is backed by some striking numbers.After product-level commission caps were removed in 2023, insurers got more flexibility over how much they could spend on running and distributing insurance. IRDAI now wants to put tighter limits on these overall expenses, known as Expenses of Management or EoM.The insurance regulator now wants insurers to bring these expenses down over a five-year period. For life insurers, the proposed EoM limit would fall to 15% within two years and 12.5% within five years. For general insurers, it would move towards 20% over five years.The regulator also wants hard commission caps that vary by product, distribution channel and the complexity and effort involved in selling and servicing a policy.Among private life insurers, average commission was 9% of total premium in FY26 but ranged from 3% to 39%, according to the consultation paper. In general insurance, the average commission was above 20%.IRDAI says distributor remuneration in a representative corporate-agent sample rose 125% between FY23 and FY25, while new business premium grew 28%. In the broker channel, general insurance premium sourced rose 37%, while commissions increased 173%.It is also concerned about persistency, or rather, how many policyholders continue to keep their policies active over time. Its paper cites 61st-month life insurance persistency of 48%, compared with 71% for online sales.The regulator’s concern is that high commission at the time of sale can encourage distributors to focus on closing the deal, rather than whether the policy remains suitable for the customer years later.Monika Halan, author and financial educator, sees the proposal as a major shift in the regulator’s approach.“For the first time, the insurance regulator is putting the consumer, the policyholder, at the heart of regulation and saying the entire industry is there to serve the policyholder,” Halan said.If you have read this far, here is the big question IRDAI is asking: are insurance sellers more focused on making a sale than on whether the policy is actually right for the customer?But there is another side to this. The industry says selling insurance is not always as simple as making a sale. Different distributors put in different levels of effort, and their costs can vary significantly.Mahavir Chopra, co-founder of Beshak, an online insurtech platform that helps customers discover and buy insurance plans, does not dispute the problems of mis-selling or excessive commissions. His concern is that a common commission structure could end up treating distributors who provide very different levels of service in the same way.“Effort is very subjective,” Chopra said. He said a broker who spends time understanding a customer’s needs, comparing products, explaining exclusions and helping with a claim is doing a different job from someone who simply facilitates a transaction.Chopra wants a more graded system, with remuneration linked to the complexity of products and the capability of the distributor. He also suggests that part of the remuneration could be linked to outcomes such as persistency, complaints and customer satisfaction.That would mean a distributor could earn differently depending on what happens after the policy is sold, rather than being rewarded primarily for bringing in new business.Halan, however, is less convinced that the industry needs more flexibility.“Removing commission caps is like allowing a free-for-all,” she said. “And the data says that is exactly what has happened with commissions and costs rising and complaints of mis-selling and unpaid claims rising.”The two also disagree over the transition period.Chopra says distributors will need time to change their business models, build teams and invest in technology.Halan believes the process can move much faster.“The big problem that I have with the consultation paper is that it's given the industry 2 and 5 years to comply with even this basic cost cap,” she said. “It should happen in the next 6 months. We have the technology. We have the data.”Under IRDAI’s proposal, the new EoM limits would be introduced in phases, with the first reductions coming within two years and the final ceilings reached within five years.IBAI PUSHES BACK STRONGLYThe industry’s pushback has now reached the government.The Insurance Brokers Association of India (IBAI) has written to Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman seeking intervention on IRDAI’s proposed changes.IBAI supports some of the regulator’s measures, including stronger suitability requirements, a ban on compulsory insurance bundling with loans and commission clawbacks for proven mis-selling. But it opposes the proposed commission caps and tighter limits on insurers’ expenses.The association estimates that at least 10 lakh livelihoods could be at risk over five years, arguing that lower expense limits could hit sales, servicing and claims staff, particularly in smaller towns.IBAI has also questioned why the existing EoM framework, introduced in 2023, is being changed before its scheduled 2028 review.“The proposals also reverse a three-year-old framework before its own scheduled 2028 review and without a regulatory impact assessment,” IBAI said.It wants the 2023 framework retained until 2028 and has called for a regulatory impact assessment covering policyholders, employment, public-sector insurers and foreign investment before new rules are introduced.So the industry’s objection is not simply that commissions could fall. It is also asking whether the same rules should apply to very different ways of selling insurance.That brings us to the customer.THE CONSUMER ANGLEIndia Today Digital’s reporting on insurance mis-selling has documented cases in which customers trusted bank employees or distributors, bought policies they did not fully understand and struggled to get help later.Take the case of a retired Kolkata couple who bought two insurance policies after an assistant bank manager approached them. They believed they were buying something similar to a safe investment. The couple eventually paid around Rs 12 lakh across the two policies and later found that the products did not suit their needs. By the time they tried to go back to the person who had sold them the policies, he had been transferred.In another case, a Mumbai man was offered a Rs 40 lakh interest-free loan and told he needed to buy insurance policies before the loan could be sanctioned. He ended up buying three policies. After the third purchase, the calls stopped.BUT WHAT HAPPENS AFTER THE SALE?That is where Shilpa Arora, co-founder and COO of Insurance Samadhan, brings another concern into the debate.Arora supports the direction of the IRDAI proposals but says the debate cannot stop at the cost of selling insurance.“My concern is that the debate is focusing more on the cost of selling insurance than on the responsibility of servicing it,” Arora said.While IRDAI has proposed measures to improve post-sale accountability, Arora says they may not go far enough.A policy may need servicing years after it is sold. Customers may need help with renewals, changes to the policy, exclusions, documentation or claims.“There should be a named servicing responsibility throughout the policy’s life. If the original seller exits, becomes unavailable or is involved in a complaint, the customer should know who takes over. The insurer must ensure continuity,” she said.Arora also wants mis-selling to be judged on more than simply identifying who made the sale.“Accountability should therefore extend beyond identifying who sold the policy. It should examine what was recommended, what was explained and whether the product was suitable for the customer.”And even when a distributor is penalised, that may not resolve the customer’s problem.“Recovering commission does not automatically correct a policy, restore cover or pay a valid claim,” Arora said.Halan makes a similar point about the role of a distributor.“The job of the distributor is to get the person to fill the form correctly, explain all the fine print, and then get somebody who's suitable for that policy and then to help with the claim,” she said.'BROKERS ARE NOT AGENTS'KC Haridas, an insurance expert and composite insurance broker, strongly opposes parts of the proposal. His argument is that IRDAI needs to account for the very different costs involved in running a broking business.“That’s a highly retrograde step. Nowhere in the world are agents paid more than brokers. Brokers have to invest. Agents need no capital,” Haridas said.Brokers have to spend on licensing, compliance, staff, training, offices and technology. Haridas also points to the capital and staffing requirements attached to running a brokerage, which he says make its economics very different from those of an individual agent.But Haridas also points to a problem that exists within the current system — particularly bancassurance.“There is a lot of mis-selling happening, especially in Bancassurance,” he said.His example is insurance sold alongside a loan. Banks, he says, can focus on covering the outstanding loan even when the house or vehicle is worth much more.“The client suffers by way of underinsurance in the event of a claim. The client is not educated on this aspect, even banks are ignorant,” Haridas said.He is also worried about consolidation. He estimates that while there are around 1,000 brokers in the market, only about 300 are active, and expects some smaller players to look for buyers if the proposed changes make the business harder to sustain.For him, the concern goes beyond brokers. If distributors have less money to invest in people and technology, he says, it could also affect the industry’s ability to expand insurance coverage in smaller and underpenetrated markets.WILL INSURANCE GET CHEAPER?Here is another question worth asking: if insurers spend less on commissions, does that automatically mean customers will pay less?IRDAI wants lower distribution and operating costs to eventually benefit policyholders. That could come through lower premiums, better returns on savings products or improved claims outcomes.But a lower commission does not automatically mean the customer will pay proportionately less.This is particularly relevant in health insurance, where the cost of the policy is also driven by hospital charges, treatment costs and the overall claims burden.Arora has argued that reducing commissions alone cannot address rising healthcare costs. She has called for greater transparency in hospital billing, clearer treatment-package pricing and better coordination between insurers and healthcare providers.The IRDAI consultation goes beyond commission rates for this reason.It proposes making distributor performance indicators such as mis-selling, surrender and persistency more visible. It also proposes commission clawbacks for mis-selling, a “Know Your Distributor” functionality and a Public Insurance Registry.The regulator wants customers to have easier access to information on product prices, quality and performance. It is also pushing digital infrastructure such as Bima Sugam to make insurance buying and servicing easier.Halan believes greater visibility of distributor performance could change how customers choose whom to trust.“Today you can rate an Uber driver, you can rate a Blinkit delivery person, and you can rate almost any service provider. Why is it that I have no idea who my agent is, who my distributor is, in terms of their past performance?” she questioned.SO WHERE DOES THIS LEAVE THE CUSTOMER?IRDAI is looking at commissions, distribution costs, persistency and mis-selling and asking whether the existing system rewards the right behaviour. Distributors, meanwhile, are asking whether lower commissions and tighter expense limits could weaken the advice, servicing and distribution network that customers also depend on.The consultation is open for stakeholder feedback until October 25, 2026. The proposals are not final and could change after the regulator examines the responses.For customers, however, the debate is less about commissions and more about what happens after they sign on the dotted line. Was the policy right for them in the first place? Was everything explained properly? And when they eventually need to renew the policy or make a claim, will someone be there to help?Those are the questions that will determine whether IRDAI’s proposed reset actually changes the insurance experience for customers.- Ends