The Insurance Regulatory and Development Authority of India (IRDAI) is set to introduce a significant overhaul of how insurance distributors earn commissions. The proposed framework aims to make the sector more transparent and customer-centric by linking commission payouts directly to the type, complexity, and servicing requirements of insurance policies, rather than a uniform approach.
New Commission Structure and Expense Limits
Under the new rules, commission limits would no longer be fixed across the board. Instead, they would vary based on the insurance segment, line of business, distribution channel, product complexity, and the effort involved in selling and servicing a policy. This shift is part of a broader recalibration of the Expense of Management (EoM) framework, which seeks to introduce lower limits over a phased period.
- Life Insurers: The EoM limit would transition to a company-level basis tied to Gross Direct Premium Income (GDPI), aiming for 15% within two years and 12.5% within five years.
- General Insurers: The calculation would move from gross written premium to domestic GDPI, with the EoM limit proposed to decline from 30% of Gross Written Premium (GWP) to 20% of GDPI over five years.
IRDAI states that these reductions are intended to lower the overall cost of insurance, potentially expanding the risk pool in general insurance and improving returns for policyholders in life savings products.
Industry Concerns Over Availability and Access
While the regulator's intentions are to enhance efficiency and transparency, the insurance industry has voiced concerns. Indraneel Chatterjee, COO and Co-Founder of InsuranceDekho, highlighted that lower commissions could make low-premium products less attractive for distributors.
“Bringing down distribution costs is an important objective, but it needs to be pursued alongside the larger goal of expanding insurance penetration,” Chatterjee stated.
For instance, a 5% commission on an ₹800 two-wheeler own-damage premium would yield only around ₹40 for the distribution entity. Such low margins, he argues, could make it difficult to sustain distribution networks for lower-value policies, potentially affecting their availability, especially in smaller cities and underserved markets.
Impact on Point of Sales Persons (PoSPs) and Customer Choice
The economics for Point of Sales Persons (PoSPs) are also a concern. Chatterjee noted that a PoSP typically sells a few policies with a combined premium of about ₹20,000. At a 4% commission (net of broker retention), this translates to approximately ₹800, which may not be sufficient incentive given the effort required for customer acquisition and servicing.
Furthermore, there is a potential risk to customer choice and competition. If commission structures encourage distributors to align with fewer insurers, it could lead to increased concentration among larger players and stifle product innovation.
Safeguards and Public Consultation
Alongside the commission reforms, IRDAI has proposed stronger safeguards against mis-selling. These include making suitability an enforceable obligation, requiring documentation of customer needs for specified life insurance sales, and maintaining an audit trail for transactions.
Insurers and large distribution entities would also be required to disclose their commission policies and structures transparently. The regulator has invited public comments on the consultation paper until October 25, aiming to balance the interests of policyholders, insurers, and distributors in creating a more efficient and transparent distribution ecosystem.