India’s insurance regulator, IRDAI, has proposed significant reforms aimed at transforming how insurance products are distributed across the country. The consultation paper released last week outlines changes that could reduce the influence of intermediaries and curb mis-selling practices, potentially reshaping the industry’s structure and customer experience.
Context Behind the Reforms
The move comes amid concerns over India’s low insurance penetration rate of 3.7%, significantly below the global average of 7.3%. Despite government targets to increase coverage by 2047, the sector faces challenges with widespread mis-selling. IRDAI’s annual report documented over 26,600 complaints of unfair practices in the financial year 2025, a 14% increase from the previous year. The regulator attributes these issues to the current distribution model, which relies heavily on intermediaries like banks, agents, and corporate platforms.
Insurance companies rely on a huge network of distributors to reach customers. This model shifted in 2023 when IRDAI replaced product-specific commission caps with a broader Expenses of Management (EoM) limit, allowing insurers greater flexibility in allocating funds for distribution. While intended to encourage efficiency, the change inadvertently intensified competition among insurers for distributor partnerships, leading to higher commissions on profitable products and creating incentives for aggressive sales tactics.
Proposed Changes and Their Implications
IRDAI’s consultation paper outlines reforms. It proposes simplifying the distribution system by categorizing intermediaries into three groups rather than maintaining separate rules for agents, brokers, and web aggregators. The regulator suggests gradually reducing EoM limits over five years, curbing insurers’ ability to spend on commissions and operating expenses. It seeks to reintroduce product-level commission caps, such as 15% for first-year health insurance premiums and 5% for renewals, with third-party motor insurance for new vehicles potentially facing zero commissions.
Transparency measures are also on the agenda, requiring distributors and insurers to disclose commission details and enabling clawbacks of improperly earned payments. Finally, IRDAI aims to expand digital infrastructure through platforms such as Bima Sugam (Insurance Made Easy) and a proposed Public Insurance Registry to streamline direct customer engagement. These changes could significantly impact distributors, with smaller distributors potentially struggling to adapt and accelerating industry consolidation.
Insurers, too, face constraints on their marketing flexibility, which could pressure profit margins. However, the regulator argues that reduced distribution costs might lower premiums or improve claim payouts.
Industry Reaction and Market Concerns
Insurance distributors faced immediate market backlash following the announcement. Stocks of platforms like Policybazaar and Turtlemint fell sharply, with some losing over 30% in value. These declines reflect concerns that reduced commission structures could severely impact revenue streams, particularly for businesses reliant on high-margin products. Smaller distributors may struggle to adapt, accelerating industry consolidation as larger players gain advantages.
One insurance platform explained that its earnings from credit-linked products could drop under the proposed rules. Such shifts threaten the business model of intermediaries who have thrived under the 2023 EoM flexibility. The regulator’s move to reintroduce product-specific caps, including zero commissions on new-vehicle motor insurance, signals a direct challenge to aggressive sales tactics that have driven mis-selling.
Addressing Mis-selling and Expanding Access
The reforms aim to tackle systemic issues driving insurance accessibility. Critics highlight how bundling insurance with loans or vehicle purchases often pushes unsuitable products on consumers. By prohibiting compulsory bundling and tightening commission controls, IRDAI seeks to align distribution incentives with customer needs rather than distributor profits.
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