India’s Insurance Overhaul: What Changes and Why It Matters

India’s insurance regulator is considering a significant reset of how insurers pay banks, brokers and agents for selling policies, with proposed commission limits that could reshape distribution across life, health and motor insurance. 

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The Insurance Regulatory and Development Authority of India (IRDAI) set out the changes in a discussion paper issued late on Wednesday. The proposals are not final. They could be revised after the regulator receives feedback, which is open until October 25. 

At the centre of the proposal is the cost of selling insurance. IRDAI wants to bring back product-level commission caps, three years after removing them, while also changing how and when distributors are paid. 

Why commissions are back under scrutiny 

The regulator’s move comes against a backdrop of distribution costs rising faster than the underlying insurance business. 

Life insurers paid ₹608 billion in commissions during fiscal 2025, an increase of 18%. Premiums, by comparison, grew 6.73% during the same period. 

India is already the world’s 10th-largest insurance market, but insurance penetration remains below the global average. The proposed rules form part of a broader attempt to expand coverage while changing the economics of policy distribution. 

The review also follows India’s decision earlier this year to allow 100% foreign ownership in the insurance sector. 

Life insurance payouts could change sharply 

For life insurance, IRDAI is looking to reduce the large commissions often paid when a policy is first sold and instead spread compensation over its life. 

Under the proposal, banks and brokers could receive commissions ranging from 5% to 20% of the first-year premium. Several products currently carry rates of more than 40%. 

The structure would also differentiate between products. Distributors would earn less for selling relatively simple policies and more for complex ones. 

Banks and brokers representing several insurers would face lower commission limits than agents associated with a single insurer. 

Health and motor insurance also face new limits 

Health insurance distribution could see a sizeable change as well. 

IRDAI has proposed limiting commissions to 15% in the first year and 5% on renewals. Distributors currently charge fees of more than 30%. 

For compulsory third-party motor cover, the proposed structure goes further. No commission would be payable when third-party insurance is sold for a new vehicle. Current commission rates in the motor insurance segment are around 25% to 50%. 

Renewals involving older vehicles would still allow limited payouts. 

The regulator has also built in higher incentives for expanding insurance outside major urban markets. Sales in small towns and rural areas could attract an additional 10% to 20%. 

Banks could face tighter rules when selling insurance with loans 

Another proposed change concerns insurance sold alongside bank loans. 

Banks would no longer be allowed to make the purchase of an insurance policy a condition for obtaining a loan. 

Where a lender offers a cheaper interest rate to borrowers who take insurance, it would have to disclose both loan rates. Customers would also have to be allowed to purchase the required cover from an insurer of their choice. 

The changes could also address cases where customers are sold policies that they later discontinue. 

Could insurance become cheaper? 

Lower commissions could reduce the cost of distributing insurance because commissions are built into premiums, according to IRDAI. 

That does not automatically mean customers would pay less, however. There is no guarantee that insurers would pass the savings from lower distribution costs on to policyholders. 

The immediate effect may instead be felt by the businesses that earn money from selling policies. 

Banks involved heavily in life insurance distribution face the greatest pressure under the proposed structure. Insurers that depend substantially on bank-led distribution could also see a near-term impact, while motor insurance brokers linked to vehicle dealers may be affected by the proposed changes to third-party cover. 

That helps explain the market’s initial response. Shares of insurance distributors and lenders with sizeable insurance income fell on Thursday after details of the proposals emerged. 

For now, the industry is dealing with a blueprint rather than a finished rulebook. Feedback remains open until October 25, leaving room for the commission limits and other provisions to change before IRDAI decides on the final framework.