IRDAI proposes reforms to insurance commission structure in India

The Insurance Regulatory and Development Authority of India (IRDAI) released a consultation paper on 23 September 2026, proposing significant reforms to the insurance commission structure in India. The paper, titled “Recalibrating Economics of Insurance Distribution,” indicates that commissions have surged while insurance penetration has stalled, prompting a reevaluation of existing practices.

According to the paper, the cost of doing business in the insurance sector has risen, with commissions outpacing premiums. The IRDAI noted that previous reforms in 2016, 2023, and 2024 failed to address these issues, leading to what the paper describes as a “high cost and commission-led business.” The proposed reforms suggest reinstating product- and channel-level commission caps, with a target to reduce general insurers’ expense of management from approximately 31% of premium to 20% over five years.

The consultation paper outlines several key measures including:
– Clawbacks for commissions, which would require insurers to recover portions of commissions if specific performance targets are not met.
– Persistency escalators to reward agents for maintaining policy renewals.
– Seller-level accountability to ensure that commissions are tied to actual sales performance.
– A ban on volume-linked incentives for bank and non-banking financial company (NBFC) staff.
– A new market infrastructure called Bima Sugam, aimed at enhancing transparency and efficiency in the distribution process.

IRDAI’s chairman, Ajay Seth, stated that the proposals are open for public comment until 25 October 2026, after which draft regulations will be developed and subjected to additional consultation.

The history of insurance commission regulation in India dates back to the Insurance Act of 1938, which imposed strict controls on how commissions could be paid. Over the decades, various legislative changes, including the nationalization of the insurance sector in the 1950s and the establishment of the IRDA in 1999, have altered the framework of insurance distribution.

In the aftermath of the Malhotra Committee’s recommendations in 1994, the market saw the entry of private insurers and a gradual de-tariffing of insurance products. This led to increased competitiveness but also to a proliferation of alternative commission structures, such as “marketing support” and “infrastructure fees,” which often sat outside the regulated commission line. The IRDAI’s 2015 amendments removed hard caps from the statute, allowing the authority to set commission levels through regulations, but subsequent reports indicated that the structure remained problematic. For instance, in September 2022, the Directorate General of GST Intelligence reported detecting ineligible input tax credits amounting to Rs 824 crore across multiple insurers, highlighting the systemic issues within the industry.

IRDAI’s proposals aim to address these longstanding challenges by creating a more sustainable commission structure that fosters transparency and accountability. The focus is on aligning the interests of distributors with those of policyholders while ensuring that operational costs do not hinder the growth of insurance penetration in a country where many remain under-insured.

The consultation paper details the urgent need for reform in a sector that has struggled with integrity and efficiency. As the proposed measures enter the public consultation phase, the outcome will be crucial for the future of insurance distribution in India.