India Proposes Wide-Ranging Insurance Reforms to Bring Down Costs

India’s insurance regulator has proposed a broad overhaul of commission rules covering life, health and motor insurance, including limits on payouts to distributors and tighter rules around insurance sold alongside loans. 

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The Insurance Regulatory and Development Authority of India (IRDAI) has proposed linking commissions to the complexity of an insurance product and the effort involved in selling it. The discussion paper also seeks to spread life insurance commissions over a longer period instead of concentrating payments in the first year. 

The proposed changes come after commission limits were removed in 2023. According to the regulator, costs have increased since then. 

The proposals are part of a wider set of changes in India’s insurance sector after the country opened the industry to 100% foreign ownership earlier this year. 

Commission rates could depend on product complexity 

Under the proposed framework, the amount paid as commission would vary depending on the nature of the insurance product and the work required to sell it. 

Products distributed through an “open architecture” model, including those sold by brokers and banks, could attract lower commissions. 

Banks and brokers are major distribution channels across life, health and motor insurance. 

Mandatory insurance products could face tighter limits. Third-party motor insurance, for instance, would attract little or no commission under the proposed framework. 

Insurance commissions linked to loans could be capped at 2-5% 

The discussion paper also addresses insurance products distributed by banks and other lenders alongside loans. 

Commissions earned by banks and lenders on such insurance sales are proposed to be capped between 2% and 5%, depending on the type of product. 

IRDAI has also proposed banning the compulsory bundling of insurance with credit. 

The two measures would affect how insurance is distributed in connection with lending products if they become part of the final framework. 

Health insurance commissions proposed at 15-20% 

For health insurance, IRDAI has proposed capping distributor commissions at between 15% and 20% when a policy is first purchased. 

Lower limits would apply after the initial sale. 

Commissions on policy renewals and on customers porting their health insurance from one insurer to another are proposed to be capped between 5% and 10%. 

The proposed structure therefore distinguishes between the commission payable on acquiring a policyholder and the amount paid on subsequent renewals or porting. 

Motor insurance commissions could face 5-10% cap 

Motor insurance is also covered by the proposed commission framework. 

For personal accident cover, the regulator has proposed limiting commissions to between 5% and 10%. 

Third-party motor insurance, which is mandatory, would carry little or no commission under the proposals. 

The approach reflects the regulator’s broader proposal to differentiate commission levels according to the nature and complexity of individual insurance products. 

Life insurance first-year commissions proposed at 5-20% 

For life insurance, IRDAI has proposed first-year distributor commissions ranging from 5% to 20%. 

The applicable ceiling would depend on the tenure of the policy. 

The discussion paper also proposes spreading life insurance commissions beyond the first year of a policy, changing the way payouts are distributed over the life of the contract. 

The proposed structure is part of IRDAI’s broader effort to revise commission rules across the insurance industry. 

IRDAI seeks feedback until October 25 

None of the commission limits outlined in the discussion paper are final regulations at this stage. 

IRDAI has invited feedback on the proposals until October 25, after which the regulator will consider the responses before finalising the framework. 

If adopted, the changes would reshape commission structures across several parts of India’s insurance market, including policies sold through banks and brokers, health insurance renewals, motor insurance and life insurance. 

For now, the proposed limits including the 2-5% range for insurance distributed alongside loans, 15-20% for initial health insurance sales and 5-20% for first-year life insurance commissions remain under consultation.