India’s insurance sector could see a major shake-up in how policies are sold as the Insurance Regulatory and Development Authority of India (IRDAI) considers introducing new distribution rules as early as January. Girija Subramanian, a full-time member responsible for distribution at IRDAI, said the regulator was considering January 1 and April 1 as possible implementation dates.
The timeline signals the regulator’s intent to move ahead with reforms to control distribution costs and make insurance more affordable, according to a Bloomberg report.
Last month, IRDAI proposed limits on commissions paid by insurers to brokers and other intermediaries. The framework covers several categories, including life, health, property and casualty insurance. The regulator also plans to gradually tighten limits on insurers’ management expenses.
The overhaul follows concerns that the easing of distribution rules in 2023 did not deliver the expected improvement in cost efficiency or insurance penetration.
Why IRDAI Wants To Change Insurance Commission Rules
According to the regulator, distribution commissions have increased faster than insurance premiums since the rules were relaxed in 2023. Higher spending on acquiring customers has also failed to produce a proportionate rise in insurance coverage.
IRDAI’s data show that private life insurers’ expenses have increased to around 22 per cent of total premiums, compared with 16 per cent in fiscal 2021. For private general insurers, the expense ratio has climbed to approximately 32 per cent from 25 per cent in fiscal 2019.
Additional rewards and incentives offered to distributors have further raised acquisition costs. In some cases, these payments have added 30 per cent to 60 per cent to the base commission.
The regulator believes that controlling these expenses could help reduce the overall cost of insurance and encourage wider adoption of policies.
Rural Insurance Distribution May Get A Boost
Alongside commission restrictions, IRDAI is proposing incentives to encourage insurance distribution in smaller towns and underserved regions.
Under the proposed framework, business sourced from towns with populations below one million could qualify for an additional 10 per cent of the applicable commission limit. The incentive could increase to 20 per cent for locations with populations below 50,000.
The regulator is also considering relaxing entry requirements for distributors and permitting them to undertake other financial and non-financial activities.
These measures are intended to broaden the distribution network beyond major urban centres and improve access to insurance in areas where penetration remains limited.
Insurers To Get Five Years To Adjust To Lower Expenses
IRDAI plans to introduce tighter expense limits gradually, giving insurers time to adapt their business models. The proposed reductions would be implemented over five years, with the first interim milestone scheduled for the financial year ending March 2029.
However, the regulator is considering a faster timeline for commission caps. Subramanian indicated that delaying the restrictions could encourage distributors to rush policy sales before each reduction takes effect, potentially increasing the risk of mis-selling.
The proposals have similarities with measures introduced in China in 2023. The Chinese regulator required insurers to align commissions with rates filed with the authorities, effectively introducing a cap. Average commissions for bancassurance subsequently declined by around 30 per cent, prompting banks and insurers to renegotiate their distribution agreements.
IRDAI To Review Stakeholder Feedback Before Final Rules
Insurers, brokers and other stakeholders have until October 25 to submit their views on IRDAI’s consultation paper. The regulator will consider the feedback before publishing draft regulations, which will undergo another round of public consultation ahead of finalisation.
The implementation date will be an important factor for the industry as companies assess the potential effect on earnings, hiring and distribution strategies.
“There is an earlier-the-better case, but getting the reforms right is more important than getting them early,” Subramanian said.
The proposed overhaul is intended to bring distribution costs under control while widening insurance access. Its ultimate impact will depend on the final commission limits, the pace of implementation and how insurers and intermediaries adapt to the new framework.
