IRDAI proposal to cap insurance commissions rattles market, but may cut premiums

The Insurance Regulatory and Development Authority of India, or IRDAI, has released a major consultation paper that has stirred up the country's entire insurance market. It is important to understand why this proposal has come about, what impact it will have on insurance companies and digital platforms, and what ordinary customers stand to gain from it.

In 2023, IRDAI had removed the cap on commissions for insurance products and left the matter to companies' internal expense rules, known as EoM. Distributors, banks and agents took advantage of this, and payouts and distribution costs rose sharply. According to IRDAI data, life insurance companies spent as much as Rs 60,800 crore on commissions in 2024-25 alone, an annual rise of 18 percent. In contrast, insurance premiums grew by only 6.73 percent. In other words, commissions grew far faster than the business itself, and the burden fell directly on customers' pockets.

As a remedy, strict limits on commissions are now being reintroduced. The maximum commission will be newly determined based on the type of product, the nature of the distributor and the effort involved. Expense limits will also be cut. Life insurance companies will be required to bring their expenses down to 15 percent within the next two years and to 12.5 percent within five years, while the proposal for general and health insurance is to bring expenses down to 20 percent within the next five years. To streamline the distribution system, a three-tier structure of IDEs, IDPs and MIIs is being created.

Companies such as Policybazaar have taken the biggest hit from this proposal. Shares of PB Fintech, Policybazaar's parent company, and other financial institutions fell by nearly 40 percent within just two days, wiping out more than Rs 32,000 crore of investor wealth. Several global brokerages, including Jefferies, have estimated that even a 10 percent cut in commission rates could reduce the income of these digital platforms and distributors by 10 to 12 percent. Banks and NBFCs that sell insurance as a mandatory add-on while giving loans will also face stricter curbs under the new rules, which will hit their fee income hard.

For ordinary customers, however, the change is expected to be beneficial. Lower costs for companies should bring down premium rates and could mean higher returns on savings plans. Customers will now get full information on commissions, making it clear how much of the money they pay goes to the agent or the bank. If an agent sells a policy through lies or misrepresentation, their ID will be recorded on the documents, and if fraud is proved, the company will have to recover the commission paid to that agent. The Bima Sugam digital platform will also make it easier to compare policies across companies, file claims and transfer a policy from one company to another.

Another relief is that customers will no longer be required to provide their name, mobile number or email ID just to check a policy's premium, features or performance. IRDAI says the aim is to stop the constant marketing calls that follow. The proposal is currently open for public comments and suggestions until October 25. While it has caused a temporary stir in the stock market, in the long run the rule is expected to make India's insurance sector more transparent, secure and customer-focused.