Irdai Proposes Tightening Insurance Commission Limits Amid Misselling Concerns

The Insurance Regulatory and Development Authority of India (Irdai) has proposed a significant reduction in the segment-level cap on expenses of management (EoM) for general insurers. Decreasing the threshold from 30% to 20% over a period of five years. For life insurers, the cap is proposed to decrease to 10% over the same timeframe.

Following the regulator's introduction of an overall, board-approved EoM limit in 2023, insurers have enjoyed greater flexibility in managing their distribution expenses. The aim was to foster competition and efficiency in the industry.

Insurers have engaged in intense competition for access to intermediaries, leading to a surge in distributor remuneration rates. This has resulted in a significant portion of premium income being absorbed by commissions and other distribution payments. Ultimately making insurance less affordable for policyholders.

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According to Irdai, distributor remuneration grew at a rate four to five times faster than gross premium between FY23 and FY25. As a result, a substantial share of premium income was diverted towards commissions and other distribution payments, reducing policyholder returns and increasing costs.

Commission and fee income at brokers has seen a notable increase, rising by 60-75% over the past three years. Meanwhile, banks and corporate agents, which account for 24-28% of new business, have captured a significant share of incremental commissions, often at the expense of smaller agents.

The motor insurance sector is a prime example of the challenges posed by complex brokerage arrangements. High acquisition costs, including mandatory motor third-party cover, have contributed to increased costs for insurers.

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Irdai has identified a link between high upfront commissions and policy churn and misselling, which can undermine policy persistency. The regulator's proposals aim to standardise commissions according to product complexity and enhance transparency in pricing and distribution payments.

The proposed framework would also shift the basis for calculating EoM for general insurers from gross written premium to gross direct premium income in India. Excluding inward reinsurance to avoid double-counting. This change is intended to reduce distribution costs while making insurance more accessible.

The regulator's broader objective is to lower distribution costs while increasing access to insurance. The proposals include measures to reduce entry and capital barriers for distributors, promoting a more level playing field.