IRDAI Reviews Insurance Commission Framework as FY25 Expense Breaches Mount Across Sector

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.

Compliance Status:	Number of Insurers
Within Prescribed Limits:	17 out of 25
Exceeded Thresholds:	8 insurers
Breach Categories:	Participating, non-participating and linked products

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.

Insurer Category:	Commission Expenses (₹ crore)
Private General Insurers:	₹30,498.00
Public Sector Insurers:	₹9,335.00
Standalone Health Insurers:	₹7,365.00
Total Gross Commission:	₹47,266.00

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.

The Insurance Regulatory and Development Authority of India has flagged a significant gap between health insurance premium growth and protection outcomes in FY25, despite the sector achieving record performance in claims settlement and premium collection.

Premium Growth vs Protection Outcomes

General and health insurers collected ₹1.17 lakh crore in health insurance premiums during FY25, marking growth of over 9% compared to the previous year. However, IRDAI noted in its latest annual report that this increase did not fully translate into proportionate improvements in coverage quality and protection outcomes.

Coverage Metrics	FY25 Performance
Premium Collection	₹1.17 lakh crore
Premium Growth	Over 9%
Lives Covered	Around 58 crore
Total Policies	Approximately 2.65 crore

The sector covered around 58 crore lives under approximately 2.65 crore policies, excluding personal accident and travel insurance. Despite this expansion, IRDAI highlighted that the health insurance protection gap remained significant, particularly in individual coverage.

Claims Settlement Performance Reaches Record High

Non-life and health insurers delivered record performance in health insurance claims settlement during FY25, processing unprecedented volumes while improving efficiency metrics. The industry settled approximately 87% of registered claims compared to 83% in FY24, processing 32.6 million health insurance claims.

Settlement Metrics	FY25	FY24	Change
Settlement Ratio	87%	83%	+4 percentage points
Repudiated Claims	8%	11%	-3 percentage points
Pending Claims	5%	6%	-1 percentage point
Total Claims Processed	32.6 million	-	-

Total payouts increased substantially to ₹94,248 crore from ₹83,493 crore in the previous year. However, the average amount paid per claim declined to ₹28,910.00 from ₹31,086.00, attributed to a larger proportion of lower-ticket claims as retail and group health insurance penetration expanded.

Structural Challenges and Coverage Gaps

IRDAI observed that while government-sponsored and group policies accounted for a large share of lives covered, individual policies represented a smaller proportion, indicating limited voluntary adoption of health insurance by households. The regulator pointed to rising healthcare costs as a structural challenge, with net incurred claims increasing during the year.

Financial Impact	Details
Medical Inflation	Continued pressure on insurers
Fraud Risks	Ongoing challenge
Treatment Costs	Rising expenses
Claims Ratio	Marginal improvement

Cashless settlement continued to dominate claims payments, with approximately 66.35% of the total claim amount paid through the cashless route, largely unchanged from 66.17% in FY24.

Regulatory Focus and Future Direction

IRDAI stressed that premium growth alone does not ensure adequate financial protection if coverage limits, exclusions, and claim settlement experiences do not keep pace with rising medical expenses. The regulator emphasized the need for insurers to improve product design, claims servicing, and transparency to strengthen consumer confidence.

The authority continues to monitor health insurance pricing, claims trends, and grievance data to address gaps between premium growth and policyholder outcomes, while balancing affordability and sustainability for insurers. During the year, IRDAI mandated insurers to work toward 100% cashless claim processing, implementing strict timelines requiring pre-authorisation within one hour and discharge approvals within three hours.