Insurance is meant to provide financial protection during difficult and uncertain situations. However, choosing the right policy is not always easy.
Customers often have to compare complicated product features, understand exclusions, evaluate premium commitments and decide whether the recommendation being made is genuinely suitable for them.
The Insurance Regulatory and Development Authority of India, or IRDAI, has now proposed a significant overhaul of insurance distribution in India. The objective is to make the system more transparent, affordable and focused on policyholder outcomes rather than merely increasing policy sales.
It is important to understand that these are currently proposals contained in a consultation paper. They have not yet become final regulations. IRDAI has invited comments from stakeholders until 25 October 2026.
Why Is IRDAI Proposing These Changes?
IRDAI has observed that insurance distribution costs have increased considerably, but this has not resulted in a corresponding improvement in insurance penetration or customer value.
According to information reported from the consultation paper, new business premiums sourced through a representative sample of life insurance corporate agents increased by 28% between FY23 and FY25. During the same period, distributor remuneration increased by 125%.
The regulator has also highlighted a concern around policy continuation. The 61st-month persistency rate for life insurance was reported at approximately 48%, while the online channel recorded a rate of 71%. Persistency indicates whether policyholders continue paying premiums and keeping their policies active over time.
A policy that is sold but discontinued prematurely may fail to deliver the protection or financial outcome for which it was purchased. IRDAI therefore appears to be shifting the focus from premium collection towards suitability, servicing, and long-term policyholder value.
1. Insurance Distribution Costs May Be Reduced
One major proposal relates to Expenses of Management, commonly known as EoM. These include operating expenses, commissions, and other distribution-related costs insurers incur.
IRDAI has proposed reducing the EoM limit for life insurers to 15% of premium within two years and 12.5% within five years. For general insurers, the proposed limits are 25% within two years and 20% within five years. The annual reduction is proposed to begin from FY2027-28.
Lower distribution and operating costs could potentially improve affordability and customer value. However, the actual impact will depend on the final regulations and how individual insurers restructure their products and distribution models.
2. Commissions Could Depend on Product Complexity and Service
Instead of applying one broad commission structure, IRDAI has proposed linking commission limits to factors such as:
- Type of insurance product
- Complexity of the product
- Distribution channel
- Effort required to explain and sell the policy
- Level of service required after the sale
- Geography in which the policy is distributed
Products that require greater explanation, documentation and servicing may have a different commission structure from simpler products that can be purchased directly.
The proposal also seeks to include monetary and non-monetary rewards within the definition of distributor remuneration. This could prevent commission limits from being bypassed through gifts, travel incentives, contests, or milestone rewards.
3. Long-Term Service and Persistency May Gain Importance
Insurance advice should not end once a policy is issued. Policyholders may need assistance with premium reminders, nominations, policy updates, claims, renewals and changes in coverage. With this in mind, the consultation paper proposes greater emphasis on renewal-linked remuneration and persistency.
For certain eligible life insurance products, renewal commissions could increase progressively from the sixth policy year, subject to the proposed limits. This could encourage distributors to remain involved throughout the policy term instead of concentrating only on the initial sale.
4. Mis-selling Could Lead to Individual Accountability
One of the most important proposals is introducing individual-level accountability for mis-selling.
IRDAI has proposed digitally linking policies to the salesperson, agent, PoSP, or intermediary responsible for the sale. Information about established mis-selling incidents could become part of that individual’s performance record. According to Mint’s analysis of the proposed reforms, established cases of mis-selling could result in commission clawbacks, while policies may be digitally linked to the salesperson or intermediary responsible for the sale.
Examples identified as potentially problematic include:
- Presenting a regular-premium policy as a single-premium policy
- Failing to explain what happens if future premiums are discontinued
- Selling a regular-premium plan to someone without a stable income
- Presenting insurance as a fixed deposit or guaranteed high-return investment
- Recommending an unsuitable ULIP without explaining its risks and charges
- Encouraging the surrender of an existing policy using misleading return claims
If implemented effectively, stronger accountability could improve the quality of conversations between policyholders and insurance professionals.
5. Compulsory Insurance Bundling With Loans Could Face Restrictions
Customers are sometimes made to believe they must purchase a particular insurance policy when taking a home, vehicle, or personal loan.
IRDAI has proposed prohibiting compulsory bundling of insurance with credit or loans, except in specified situations where there is a clear customer benefit and proper consent.
Where insurance is offered as additional security for a loan, the customer may need to be informed about the interest rate with and without the insurance. This would allow borrowers to make a more informed choice.
6. Digital Comparison and Transparency Could Increase
The consultation paper also discusses a simplified distribution structure consisting of Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions.
Digital platforms such as Bima Sugam are expected to provide customers with a more neutral environment for comparing insurers, products, prices, claim performance and grievance records.
Separately, IRDAI has also proposed a Public Insurance Registry that could help policyholders view policies across insurers, reduce repetitive documentation and simplify servicing and claims.
What Should Policyholders Do?
Regulation can improve transparency, but every customer must still ask the right questions before purchasing insurance:
- What specific financial risk does this policy cover?
- How long will I have to pay the premium?
- What happens if I stop paying?
- What are the exclusions, charges and surrender conditions?
- Is the coverage adequate for my family’s needs?
- Why is this product suitable for me?
Never purchase insurance solely because of tax benefits, projected returns or pressure to complete the transaction quickly.
Key Takeaway
Overall, the proposed reforms are a welcome move towards making insurance distribution more transparent, accountable and focused on policyholder interests.
Greater scrutiny of commissions, stronger action against mis-selling and more emphasis on long-term servicing could help rebuild customer confidence. However, the real impact will depend on how the proposals are finalized, implemented and monitored across the industry.
Regulation can create a stronger framework, but customers must still understand what they are buying. Before choosing an insurance policy, ask whether it provides the right protection, whether the premium is sustainable and whether its terms have been explained clearly.
At Swastik Investments, we believe insurance should be recommended for the protection it provides and the role it plays within a complete financial plan, not merely for tax savings, commissions, or projected returns.
A policy should not simply be sold. It should be understood, suitable, and able to support the family it is meant to protect.
Disclaimer: This article is for general information and investor awareness. The proposals discussed are subject to consultation, revision, and final notification by IRDAI.
