Buying new car? Your motor insurance dealer may earn up to 38% commission - what IRDAI's proposed fix means

A new car purchase often comes with the mandatory motor insurance policy arranged through the dealer or an automotive dealer-linked intermediary. While buyers are not required to purchase insurance through them, many still do so for convenience and to avoid the hassle of arranging a policy separately.

These parties receive hefty commissions on the policies they sell, putting the practice under scrutiny of the Insurance Regulatory and Development Authority of India’s (IRDAI), which has proposed changes to limit such payouts.

According to the insurance regulator's consultation paper published last week, these distributors earned almost ₹7,050 crore as commission on ₹29,000 crore of motor insurance premium in FY 2025.

“Motor insurance is a prime example of lack of transparency driving high commissions in spite of products being simple and a part of the insurance being mandatory (third-party insurance),” the consultation paper noted.

Motor insurance commissions surge; see figures

Motor insurance has emerged as one of the highest commission segments in the industry, with the average payout rate standing at 24% in FY25.

The gap between premium growth and commission growth has also widened sharply. Between FY23 and FY25, motor insurance premiums grew by around 34% while commissions jumped nearly 259%. In the same period, the average commission rates on broker-placed motor business rose from 9% to 25%.

Even commissions on regulated third-party motor insurance increased significantly, rising from 4.3% of premium in FY23 to 22% in FY25.

MISPs, OEM brokers lead commission earnings

The biggest commission earners are concentrated at the point of sale. Original Equipment Manufacturer (OEM) brokers and Motor Insurance Service Providers (MISPs), which include motor vehicle dealers, together account for around 30% of motor insurance business across new and old vehicles.

For newly purchased vehicles, OEM brokers get an average commission of 27%, while MISPs receive 38%. The latter one also earns an average 12% commission on policies for older vehicles brought to their garages for servicing.

How IRDAI plans to fix this gap

A key proposal concerns where customers can purchase motor insurance.

The insurance regulator has proposed that motor insurance products for both new and old vehicles should be available on Market Infrastructure Institution (MII) platforms such as Bima Sugam, which is expected to become operational in the next four to six months. It has also proposed capping the platform fee for not-for-profit platforms at 5% of the premium.

For customers buying new vehicles from a showroom, dealers would have to prominently display an option to purchase motor insurance through the MII platform, including a QR code through which customers can access the platform. They would also have to make new-vehicle customers aware of this option.

Third-party motor insurance may see lower commissions

IRDAI has also proposed much lower commissions for mandatory third-party insurance and easy-to-sell motor insurance for new vehicles.

The regulator's paper has proposed that commission on mandatory third-party insurance for new vehicles should be nil for distribution entities and 2.5% for agents, with own-damage and other covers capped at 5% to 15% depending on the channel and the age of the vehicle.

These are proposals under consultation, not final rules. IRDAI has invited comments and suggestions from stakeholders before finalising the framework.