The Insurance Regulatory and Development Authority of India (IRDAI) is reportedly evaluating a significant reform to how insurance distributors are compensated. The proposed changes would move away from substantial upfront commission payments towards a system of staggered payouts spread across the entire duration of an insurance policy.
Why the Commission Structure Needs Reform
Under the existing framework, insurance distributors can receive up to 40% of premiums as commission for certain life and health insurance products, with a large portion disbursed immediately upon sale. Experts and the regulator believe this structure inadvertently incentivizes intermediaries to prioritize sales volume over ensuring product suitability for customers, leading to instances of mis-selling or policy churning that may not benefit policyholders.
IRDAI aims to address these issues by fostering a more customer-centric approach. By linking remuneration to the policy's longevity, the regulator intends to encourage long-term customer servicing, improve policy persistency rates, and ultimately strengthen consumer confidence in insurance products.
Details of the Proposed Changes
The core of the proposal involves distributing commission payments throughout the policy's tenure. This model is common in developed markets like the United States, the United Kingdom, and various European countries, and its adoption would bring India's regulatory framework closer to international best practices.
Beyond staggered payments, IRDAI is also exploring a remuneration model that ties distributor earnings directly to the effort involved in selling and servicing a policy. This could mean higher commissions for agents who provide personalized financial advice, assist with documentation, and offer continuous support during the claims process, compared to distributors like banks that primarily offer insurance as an add-on.
Additional considerations include imposing product-wise commission caps based on the complexity and term of different insurance products, alongside stricter disclosure requirements for all intermediaries to enhance transparency for policyholders.
Expert Perspectives on the Overhaul
Kulin Shah, Co-founder and COO of Onsurity, commented on the proposed reforms, stating, “The reforms suggested indicate a larger change in the insurance landscape in terms of changing the system of incentivization from gaining customers to providing them value through proper treatment. Trust plays an important role in the insurance ecosystem as insurance penetration increases because of improved trust based on offering necessary transparent advice, quality products, and helpful post-sale service.”
Shah emphasized that insurance should be perceived as a long-term financial protection tool rather than a one-time transaction. He also highlighted the critical role of digital solutions in customer education, simplification, disclosures, and servicing to facilitate informed decision-making.
Arun Ramamurthy, Co-founder of Staywell.Health, echoed this sentiment, welcoming the proposal. He noted that staggered commissions would effectively shift the industry's focus from singular sales transactions to cultivating enduring customer relationships. “Linking intermediary compensation with the long-term performance and continuity of policies should reduce mis-selling and improve the quality of advice provided to customers,” Ramamurthy added.
Both experts believe that stronger disclosure norms and customer-centric incentives are crucial for enhancing consumer confidence and reinforcing insurance's role as a vital long-term financial safety net.