The Insurance Regulatory and Development Authority of India (IRDAI) is preparing to frame draft rules on insurance commissions, with a specific focus on taking action in the interest of policyholders, according to ET Now.

Regulatory Initiative Overview

The planned draft rules represent IRDAI's ongoing efforts to strengthen regulatory oversight in the insurance sector. The regulator's emphasis on policyholder interests indicates a shift toward ensuring that commission structures serve the broader goal of consumer protection and market transparency.

Focus on Policyholder Protection

The initiative underscores IRDAI's commitment to balancing the interests of various stakeholders in the insurance ecosystem. By specifically mentioning that actions will be taken in policyholder interest, the regulator signals its priority to ensure that commission arrangements do not compromise consumer welfare or create conflicts of interest that could disadvantage insurance buyers.

Industry Implications

The development of new commission rules could have significant implications for insurance intermediaries, agents, and brokers operating in the Indian market. The regulatory framework is expected to provide clearer guidelines on commission structures and practices, potentially enhancing transparency in the insurance distribution process.

The Insurance Regulatory and Development Authority of India (IRDAI) has formed a committee to review distribution compensation in the insurance industry amid mounting concerns over surging commission costs in FY25. The regulatory scrutiny comes less than two years after IRDAI scrapped product-wise commission caps, with rising distribution costs now inflating premiums across the sector.

Life Insurance Sector Faces Widespread Expense Breaches

The life insurance segment witnessed significant expense limit violations in FY25, with regulatory compliance becoming a major concern for the industry.

Total gross expenses of management in life insurance rose to ₹1.38 lakh crore in FY25, representing approximately 15.60% of total gross premium. Commission payouts increased 18% to ₹60,800.00 crore, significantly outpacing premium growth of 6.73%, highlighting the industry's continued reliance on commission-led distribution.

Non-Life Insurance Sector Seeks Regulatory Forbearance

The general insurance space faced similar challenges, with 15 non-life insurers breaching expenses of management limits and seeking regulatory forbearance, which IRDAI has indicated is under examination in its annual report.

While aggregate operating costs moderated marginally, commission payouts remained elevated relative to premium growth across the non-life insurance sector.

Regulatory Framework Under Review

Under the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, insurers are required to operate within expense caps linked to product structure, premium-paying term, and duration of business. Industry sources indicate that discussions are underway regarding whether commission ceilings should be reinstated.

Industry executives emphasize that the discussion focuses on designing a new framework rather than reverting to the earlier regime. They argue that returning to product-wise commission caps would be counterproductive given changes in product design, persistency norms, and distribution economics.

Industry Concerns Over Mis-selling Correlation

Data reveals a positive correlation between high first-year commissions and mis-selling complaints in the first policy year. While insurers acknowledge that reasonable commissions are necessary to improve insurance penetration, industry executives warn that overpaying distributors encourages aggressive sales practices, ultimately benefiting intermediaries while policyholders and insurers bear long-term costs.

The regulatory review reflects broader concerns about balancing distribution incentives with consumer protection and market stability as the insurance sector continues to evolve.