IRDAI’s New Commission Caps Challenge Insurance Distributors

India’s insurance sector is bracing for significant changes following new proposals by the Insurance Regulatory and Development Authority of India (IRDAI) aimed at capping commissions and tightening expense limits for insurers. The regulator’s move seeks to reduce distribution costs and make insurance products more affordable for consumers.

According to a recent report by Kotak Institutional Equities, these reforms could alter how insurance products are sold and how much distributors earn. The industry might see uneven effects, with insurers likely able to absorb the changes over time, while distributors—especially non-banking financial companies (NBFCs) and large multi-insurer platforms—could face substantial challenges adapting to lower commission structures.

Background on the commission issue

The IRDAI’s intervention is driven by the observation that commission payouts have been increasing faster than the new business premiums they generate. For life insurance corporate agents, new business premiums rose from Rs 630 billion in fiscal year 2023 to Rs 800 billion in fiscal year 2025, a 1.3 times increase. In contrast, commission payouts more than doubled, climbing from Rs 96 billion to Rs 216 billion in the same period. This pushed the effective commission rate to 27% of first-year premiums. In the general insurance segment, broker-led premiums grew 1.4 times, while commissions jumped 2.7 times.

In response, IRDAI has proposed a comprehensive reset of the commission framework. Life insurers would have to limit commission on new business to 15% within two years and further reduce it to 12.5% within five years. General insurers would face caps moving from 25% to 20%. Additionally, the commission structure will become more restrictive based on product types and distribution channels.

Impact on credit-linked insurance and key players

The most significant changes are expected in credit-protect insurance, a segment that traditionally offers some of the highest commissions. The IRDAI proposes capping commissions for credit-linked life products at just 2% for single-premium policies and 2.5% for multi-year products in the first year. This is a steep drop from the average 22% commission rate recorded for credit-life single-premium policies in fiscal year 2025.

This shift has major implications for NBFCs, which have increasingly relied on insurance distribution as a revenue stream. Kotak estimates that insurance commissions contributed between 3% and 25% of pre-tax profits for select NBFCs in fiscal year 2026. The lower commission caps could thus affect their profitability and business models.

PB Fintech, a major player in health insurance distribution, also faces tighter restrictions. Proposed caps for corporate agents, banks, and multi-insurer platforms are significantly lower than those for individual agents. For health insurance, commissions for new business would be limited to 15% for distribution entities and 5% on renewals, compared to 20% and 10% for individual agents. This could reshape the economics of health insurance distribution, a core focus area for PB Fintech.

How insurers might respond

On the other hand, insurers themselves might weather the changes more easily. While lower commissions could initially reduce sales volumes, especially in savings-oriented and credit-protect products, insurers might retain part of the cost savings or shift distribution efforts towards individual protection products that carry different commission structures.

SBI Life is considered well positioned for this transition due to its relatively low commission rates compared to peers. Health insurers may benefit if reduced commissions lead to lower premiums, potentially boosting demand. For instance, ICICI Lombard could see some relief from the proposed reduction in motor insurance commissions as it manages ongoing claims pressure.

Next steps and regulatory process

It is important to note that these proposals are currently under consultation. The IRDAI released the draft framework on September 23 and has invited public comments through October 25. Final regulations may evolve based on stakeholder feedback.

The insurance sector in India is a vital component of the financial services market, with distribution costs forming a significant part of product pricing. The IRDAI’s efforts to streamline commissions reflect a broader trend towards improving cost efficiency and customer affordability in insurance. How insurers and distributors adapt to these changes will be closely watched by market participants and regulators alike.

Disclaimer: This article was written by Sakshi Kumari, who is not a SEBI-registered Research Analyst or Investment Adviser. Neither Sakshi Kumari nor her relatives hold financial interests in the companies mentioned. The views expressed are those of the original SEBI-registered analysts and should not be considered as recommendations of The Economic Times Digital or the author. Readers should consult original research and make investment decisions based on their own judgment.