Irdai May Revamp Commission Rules To Curb Insurance Mis-selling

Insurance buyers may see changes in how policies are sold if the Insurance Regulatory and Development Authority of India (Irdai) proceeds with an overhaul of distributor commissions. The regulator is examining a system in which commissions are paid over the policy term rather than concentrated as large upfront payouts.

The proposed change seeks to reduce the incentive to push unsuitable products or replace an existing policy merely to generate a fresh commission. It is also aimed at reducing distribution costs in a market that has expanded quickly but still has low insurance penetration.

Upfront Payouts Under The Scanner

Insurers and distributors currently negotiate commissions within regulatory limits. A Reuters report, citing industry executives, said commissions on some life and health products can be as high as 40 per cent of the premium, with a substantial share paid early in the policy. This structure can encourage a focus on new sales rather than long-term service and policy retention.

Policy churn can be costly for customers. Someone persuaded to replace an existing policy may lose benefits built over time, face a fresh waiting period in health insurance or find that exiting a life policy is more expensive than expected. Spreading commissions over the policy term could make distributors more accountable for renewals, servicing and the buyer’s overall experience, according to a Reuters report.

Irdai chairman Ajay Seth said last week that the regulator was working on a consultation paper on distribution reforms, which could be issued by the end of July. Reuters reported that a draft framework may be circulated within the next four to six weeks.

Service May Determine Payouts

The regulator is also considering a model that takes account of the work involved in selling and servicing a policy. An agent offering face-to-face advice, helping with paperwork and supporting a claim could be paid differently from a bank or other channel selling insurance as an add-on.

Commission caps may vary by product, policy tenure and complexity. Disclosure requirements for agents, brokers and other distributors could also be tightened. This may give buyers a clearer view of how the seller is paid and whether the remuneration structure could shape the recommendation.

What It Means For Buyers

No final rules have been issued. Still, the review is significant for a sector where annual gross premium collections exceed Rs 11.9 trillion. Insurance penetration stood at 3.7 per cent of gross domestic product in 2024, below the global average of 7.2 per cent cited by Allianz.

For buyers, the immediate lesson is to compare benefits, exclusions, renewal terms and premium commitments before signing up. Ask whether a policy fits your needs, rather than accepting a recommendation based only on the sales pitch.

FAQs

1. Why is Irdai considering changes to insurance commissions?

Irdai is examining whether staggered commissions can reduce mis-selling and discourage distributors from replacing a suitable existing policy only to earn a fresh payout.

2. How can policy churn affect an insurance buyer?

Replacing a policy may mean losing accumulated benefits, facing fresh waiting periods in health insurance or receiving a lower surrender value in a life policy.

3. What should buyers check before accepting an insurance recommendation?

Compare the policy’s benefits, exclusions, premium-paying term, renewal conditions and claims support, instead of deciding solely on a seller’s pitch.