India’s insurance regulator – IRDAI is planning changes in commission rules to reduce Mis-selling. As per reports, commissions may be paid over the entire life of an insurance policy. Currently, distributors often receive a large part of their commission upfront.
IRDAI also wants to reduce high distribution costs in India’s fast-growing insurance market. As per sources, the draft framework could be released within the next four to six weeks.
Paying commissions in stages would bring India’s insurance commission system closer to major global markets, including the United States, the United Kingdom and Europe.
The proposal to replace large upfront commission payments with commissions paid over the life of a policy has not been reported earlier.
IRDAI Chairman Ajay Seth said last week that the regulator was working on a consultation paper on insurance distribution reforms. The paper could be released by the end of July. Indian authorities have been working to reform the country’s insurance industry.
There are concerns that high upfront commissions encourage distributors to focus more on sales than on customer needs. This can lead to mis-selling and customers being pushed to buy insurance policies that may not be suitable for them. If commission is provided in stages, then it will reduce Mis-selling and improve customer service.
Industry executives said distributors can earn commissions of up to 40% of premiums on some life and health insurance products. A large part of this commission is paid upfront. India is one of Asia’s largest insurance markets. Annual gross premium collections are more than Rs 11.9 trillion, or about $125 billion.
However, India’s insurance penetration was only 3.7% of GDP in 2024. Insurance penetration is measured by the total insurance premiums collected in a year compared with the country’s GDP. The global average was estimated at 7.2% by Allianz.
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Last year, the government reduced the tax on individual health and life insurance premiums from 18% to 0%. The move was aimed at making insurance policies more affordable.
The government also allowed up to 100% foreign direct investment in the insurance sector. This has increased interest from foreign companies.
Commission Pricing Model
IRDAI is also considering a new commission pricing model. Under the proposed system, commission payments may depend on the effort required to sell and service an insurance policy, the sources said.
Currently, commissions are mainly based on a fixed rate agreed between an insurance company and a distributor.
Under the new model, agents who provide face-to-face advice, help customers complete paperwork and assist with insurance claims may receive higher commissions.
In comparison, banks that sell insurance policies as add-on products may receive lower commissions.
IRDAI may also introduce commission limits based on the type of insurance product, policy duration and complexity, according to the sources.
The regulator is also likely to tighten disclosure rules for insurance agents, brokers and other distributors. The move could bring more transparency to commission and payment structures.
