IRDAI plans insurance commission overhaul to curb mis‑selling with staggered payouts and stricter transparency rules

Insurance Regulatory and Development Authority of India (IRDAI) is making strides towards a significant overhaul of how insurance distributors are compensated. The primary objective of the regulator is to reduce mis-selling by shifting away from large upfront commissions towards payments strategically spread across the life of the policy, according to a Reuters report.

Shift to staggered commission model

The major changes proposed by the IRDAI will fundamentally transform the nation's insurance distribution ecosystem.

Under the proposal, commissions will not be heavily tilted towards upfront payouts but will instead be distributed over the entire duration of the policy. The move is aimed at reducing policy complexity, discouraging churn and the sale of unsuitable products. These concerns, regulators and industry participants say, have been fueled by aggressive incentive structures.

According to industry estimates, distributors can earn up to 40% in commissions on premiums for certain health and life insurance products, with a meaningful portion currently paid at the time of sale.

Regulators believe this encourages sales-driven behaviour rather than objective, suitability-based advising. IRDAI Chairman Ajay Seth, as per the report, has indicated that a consultation paper on distribution reforms could be released soon, clearly suggesting an imminent policy discussion with associated participants and industry stakeholders.

Transparency push and global alignment

Apart from focusing on restructuring payout timing, the regulator is also considering developing a model that more effectively links commissions to the effort required to serve and assist customers. This brings into the picture the agents and distributors who provide core advisory and support services, along with help for documentation and claim management.

Such agents and distributors could potentially earn higher compensation than those operating in more transactional sales channels. The proposed framework may also introduce new caps and restrictions on commissions, depending entirely on product type, complexity and policy duration, while strengthening disclosure requirements for all stakeholders and intermediaries to boost accountability and improve transparency.

Basics of the Indian insurance market

The nation's insurance market collects over ₹11.9 trillion in annual premiums ($125 billion) but still records relatively low penetration at 3.7% of Gross Domestic Product (GDP), highlighting the need to improve customer trust, educate citizens and broaden coverage.

Furthermore, if implemented, these sweeping changes will bring India closer to its global peers in markets such as the US, the UK and Europe. In these nations, commission structures are generally spread over time and more efficiently aligned with ongoing service than with upfront sales incentives.

Currently, India has more than 60 prominent insurance companies operating nationwide. Some of the major ones are state-owned Life Insurance Corporation of India (LIC), ICICI Prudential, HDFC Life, among others.

In the non-life segment, key market players include ICICI Lombard and Bajaj General Insurance, which are among the leading general insurers in the country. Foreign firms such as Prudential, Sun Life Financial, and AIG are also present in the Indian insurance market, adding to the mix of global participation in the sector.