The Insurance Regulatory and Development Authority of India has proposed a wide-ranging overhaul of the insurance distribution system in India, with stronger measures aimed at preventing mis-selling and improving transparency for policyholders.
The proposed changes are contained in IRDAI’s consultation paper titled “Recalibrating Economics of Insurance Distribution”. The paper covers insurance distribution structures, insurer expenses, commissions, market conduct, transparency and digital infrastructure. The proposals are intended to create a more transparent and customer-focused insurance distribution system, but they are not final regulations at this stage. Stakeholders have been invited to provide their views before the consultation process is completed.
One of the most significant proposals concerns commissions paid to insurance distributors and salespersons. IRDAI has proposed a mechanism under which commissions could be clawed back when mis-selling is established. This means that remuneration received for a policy could potentially be recovered in cases where the sale involved practices that breached the proposed safeguards.
According to reports on the consultation paper, IRDAI has also proposed linking the identity of the individual salesperson to every insurance policy sold. The measure is intended to strengthen accountability at the point of sale. Instead of responsibility resting only at the level of an insurer or distribution organisation, the identity of the person involved in selling or soliciting the policy would be traceable.
The proposal is significant because insurance sales can involve several distribution channels, including agents, corporate agents, brokers, banks and other intermediaries. Greater sales traceability could make it easier for insurers and regulators to identify the individuals involved when complaints or concerns about a particular sale arise.
IRDAI has also proposed restrictions on certain incentive structures. Volume linked or reward linked incentives for bank and non banking financial company employees involved in insurance sales could be prohibited under the proposed framework. The objective is to reduce situations where sales targets or financial rewards could influence the way insurance products are presented to customers.
Another proposed change relates to compulsory bundling of insurance with loans or other financial products. IRDAI has proposed restricting compulsory bundling while allowing combinations that meet regulatory requirements. This is intended to address situations where customers may feel pressured to purchase insurance along with another financial product.
The regulator is also looking at greater disclosure of insurance distribution costs. Insurers and large distribution entities could be required to disclose their commission policies and structures in a simpler and more accessible manner. The proposals would bring greater visibility to how insurance distributors are compensated and how distribution costs form part of the overall insurance business model.
The consultation paper also proposes disclosure of information relating to mis-selling incidents. Such disclosures could provide customers and regulators with greater visibility into market conduct and help identify recurring problems in insurance sales.
IRDAI’s proposals come amid concerns about rising distribution costs and the relationship between commissions, sales practices and policyholder outcomes. The regulator has pointed to instances where distributor remuneration has increased significantly faster than the underlying insurance business in some distribution channels. In one example cited in the consultation discussion, new business premium through corporate agents increased by 28 percent between financial year 2022-23 and financial year 2024-25, while total distributor remuneration increased by 125 percent.
The regulator is therefore proposing changes to the way commissions are determined. Instead of relying on a uniform approach, commission limits could vary according to the insurance segment, line of business, distribution channel, complexity of the product and the effort required to sell and service it. The proposal also considers different treatment for business sourced from underserved areas.
IRDAI has separately proposed reducing insurers’ Expense of Management limits over a five year period. For life insurers, the proposed company level limit would move towards 15 percent of Gross Direct Premium Income within two years and 12.5 percent within five years. For general insurers, the proposed framework would move towards a 20 percent limit over five years, while also changing the basis used for calculating the expense ratio.
The proposed reforms also seek to bring direct and indirect monetary and non monetary payments within the commission framework. This is intended to reduce the possibility of compensation arrangements being structured outside the main commission system.
For customers, one of the most important aspects of the proposals is the greater emphasis on suitability. Insurance products can differ substantially in terms of coverage, exclusions, premiums, policy terms and benefits. The proposed framework seeks stronger documentation of customer needs and suitability during the sales process. This could help establish whether a product was appropriate for the customer at the time it was sold.
The proposed measures also fit into IRDAI’s broader effort to make insurance distribution more transparent and digitally accessible. Digital infrastructure such as Bima Sugam and the proposed Public Insurance Registry is expected to support easier comparison, digital access and greater visibility of insurance information.
It is important for policyholders and insurance sellers to note that these measures are still proposals. The consultation paper does not automatically make the proposed commission clawback, incentive restrictions or disclosure requirements applicable as final rules. The regulatory framework may change after feedback from insurers, distributors, consumers and other stakeholders.
For insurance customers, the proposed changes could mean greater transparency about how policies are sold and how distributors are compensated. For insurance agents and other sales professionals, the proposals could result in greater responsibility for the quality and suitability of sales, particularly if individual policy sales become more closely linked to the identity of the salesperson.
The proposed commission clawback mechanism could also change the incentives surrounding insurance sales. Instead of focusing only on acquiring new policies, the proposed framework places greater emphasis on the quality of sales, servicing and policyholder outcomes. IRDAI has said the broader objective is to move the industry towards a distribution model that gives greater importance to affordability, persistency, quality of advice and customer value.
Overall, the proposed IRDAI reforms could bring significant changes to the way insurance products are distributed in India. Commission structures, sales incentives, individual accountability, disclosure requirements and safeguards against mis-selling are all part of the proposed framework. However, since the consultation process is still underway, customers and insurance professionals should treat these measures as proposed changes rather than final rules.
