Cheaper, Simpler, Fairer? What IRDAI’s Proposed Distribution Reforms Could Mean for Insurance

What is being proposed?

When you buy an insurance policy, a part of the premium you pay does not go towards covering your risk. It goes towards the cost of selling the policy: commissions to the person who sold it, running the company’s offices, advertising and so on. On 23 September 2026, the insurance regulator IRDAI released a consultation paper called “Recalibrating Economics of Insurance Distribution[1]”. In plain terms, it asks: how much should it cost to sell insurance, who should be paid what, and how can customers be better protected?

Until now, insurance has reached customers through a tangled web of agents, banks, brokers, online platforms and other intermediaries. Different types of sellers have followed different rules, even when they do very similar work. The paper proposes to simplify this into just three categories:

• Insurance Distribution Entities: organisations that sell insurance.
• Insurance Distribution Persons: individuals such as agents and point-of-sale persons.
• Market Infrastructure Institutions: digital platforms, such as Bima Sugam, where customers can directly compare and buy policies.

The guiding idea is “same activity, same regulation”. Put simply, if two sellers do the same kind of work, they should follow the same rules.

The key changes, compared with the present position

Lower limits on the cost of running an insurer:

Insurers today are allowed to spend only a certain share of their premium on expenses, called the “Expense of Management”. The paper proposes lowering this limit in stages. For general insurers (motor, health, home and similar cover), the limit would move from the present 30% of gross written premium to 25% within two years and 20% of domestic gross direct premium income within five years. For life insurers, the proposed limit  would be 15% within two years and 12.5% within five years. The gradual path is meant to give companies time to adjust.

Commissions linked to effort:

The paper proposes reintroducing specific commission ceilings, replacing the more flexible framework introduced in 2023. The proposed limits would vary depending on the type of product, its complexity, the sales channel and the effort involved in selling and servicing it. Selling in small towns and rural areas could earn extra rewards, encouraging insurance to reach people who have been left out.

More openness:

Insurers and large distributors would have to explain their commission structures in simple language. For certain large commercial policies, the commission would be mentioned on the policy itself. Customers would then know how much of the price goes towards selling costs. Commission would also include every kind of payment to a seller, whether direct or indirect, in cash or otherwise, so that companies cannot get around the limits.

Protection against wrong selling:

Bank and finance company staff would no longer be allowed to earn volume-linked rewards for selling insurance. Sellers would have to record the customer’s needs and show the product suits them. If a policy is mis-sold, the commission could be taken back. Forcing customers to buy insurance as a condition for getting a loan or another service would face stronger safeguards.

Easier entry:

Registration would be simpler, with much lower capital requirements and fees, so that small entrepreneurs in smaller towns can also become insurance sellers.

Why is this change needed?

The proposals build on the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, which aims to grow the insurance sector, protect policyholders and make doing business easier.

Several problems sit behind the reforms. First, the existing system is complicated, and some players take advantage of gaps between different sets of rules. Second, high selling costs push up the price of general insurance and reduce the returns people get from life insurance savings products. Third, customers often cannot tell who they are really buying from, or how much commission is hidden in the price. Fourth, insurance is sometimes pushed along with loans or other products, and customers may buy policies that do not suit them. Finally, many Indians, especially in smaller towns and villages, still have no insurance at all.

General context on how other jurisdictions handle this

European Union:

The Insurance Distribution Directive concentrates on telling customers clearly about costs and commissions, managing conflicts of interest and making sure advice suits the customer. It generally does not set hard limits on commission or expenses, though there is ongoing debate about restricting incentives on investment-linked products.

United States:

Insurance is regulated mainly by individual states. The focus is on licensing sellers and requiring that recommendations serve the customer’s best interest, especially for savings products such as annuities. Overall limits on commission are uncommon.

Asia-Pacific:

Approaches vary. Australia reduced and phased down upfront commissions on life insurance after a major inquiry into misconduct in the financial sector. Singapore has pushed for better advice standards and commission reform. China has tightened rules so that commissions actually paid match what insurers report to the regulator.

Overall, most regions rely on disclosure and good-conduct rules. India’s proposal goes a step further by combining those with explicit limits on expenses.

What will it mean for insurance companies?

Financial impact:

Lower expense limits could put pressure on profit margins, particularly for companies whose selling costs are high. They will need to find savings or become more efficient. A cut in the regulatory fee paid by insurers will help a little. Mandatory cost audits would add to compliance requirements, while large insurance distribution entities would also face additional financial disclosure obligations.

Operational impact:

Insurers will have to reorganise their networks of sellers into the new categories and revise contracts and computer systems. They will need to record customer needs, link every policy to the person who sold it, watch for misleading online designs that trick customers, and manage commission recovery when mis-selling is found. Connecting with digital platforms like Bima Sugam and the Public Insurance Registry will need investment in technology.

Business impact:

Banks and finance companies that rely on sales targets and rewards will have to rethink how they motivate staff. Commission limits may differ for sellers tied to one insurer and those offering many insurers’ products, which could change how companies choose their sales channels. Easier entry could bring in many new small sellers and more competition. Rewards for selling in underserved areas open a real opportunity in smaller towns. In the long run, insurers offering simple, fairly priced products and honest service may stand to gain the most.

What next?

These are proposals, not final rules. IRDAI has invited comments from the public and all stakeholders until 31st October 2026. Therefore, stakeholder feedback will be crucial to creating a framework that balances affordability, transparency, and better outcomes for policy holders still keeping in mind the sustainability of insurers and intermediaries.

Source: IRDAI consultation paper, “Recalibrating Economics of Insurance Distribution” (Part 1, 23 September 2026) – https://iib.gov.in/assets/dr/Distribution Reforms Part 1.pdf

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[1] https://irdai.gov.in/document-detail?documentId=9852267

Author: Sarnindita Chatterjee

Co-Author: Amiya Mukherjee

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