IRDAI New Rules: The insurance industry in India has seen rapid growth, but the actual coverage provided by insurance policies has not kept pace with the increase in premiums. Moreover, the expenses related to selling insurance and the commissions paid to intermediaries have surged, raising concerns about the value received by customers in exchange for their premiums.
To tackle this issue, the Insurance Regulatory and Development Authority of India (IRDAI) has introduced a consultation paper on reforms in insurance distribution. The regulatory body has suggested a five-year plan to reduce expense management for insurance companies and curb the high commissions charged by agents and corporate intermediaries. Let’s explore in simpler terms the potential impact of these stringent proposals by IRDAI on the insurance sector, how policyholders stand to benefit directly, and the challenges faced by companies and intermediaries.
Reasons for the reforms:
Data from IRDAI indicates that there has been little improvement in insurance penetration in India over the last decade:
Stagnant policy count: The number of new individual life insurance policies sold in India was around 26.6 million in FY 2016, only slightly increasing to 27 million in FY 2025. The total number of active policies has remained steady at about 32.7 million.
Parallel growth with GDP: Despite the Indian economy growing at an average rate of 10% in the last decade, the life insurance sector saw a growth rate of 10% and general insurance at 13%, showing a lack of alignment with economic progress.
Delay in achieving ‘Insurance for All’ target: Although there has been some growth in general insurance policies, the pace is insufficient to reach the national goal of ‘Insurance for All by 2047’.
Sharp rise in business expenses and commissions:
As the customer base stagnated, the operational costs of insurance companies and their agents soared:
Increased operational costs: The operational costs of life insurance companies have surged from 18% to 39% (excluding LIC and SBI Life with costs around 10-12%). For general insurance companies, the range is from 20% to 48%.
Commission spikes: While new premiums through corporate agents increased by 28% between FY2023 and FY25, their total commissions rose by 125%! General insurance brokers saw a 37% growth in premiums, accompanied by a 173% increase in commissions.
Additional incentives burden: Brokers and agents were receiving extra incentives ranging from 30% to 60% above the base commission, ultimately passed on to customers through higher premiums.
IRDAI’s proposed solution: Reduction in companies’ expenses
IRDAI has outlined a 5-year plan to decrease the management expense limits for companies:
Life Insurance Companies: The current 30% limit needs to be reduced to 15% within 2 years and further down to 12.5% within 5 years.
General Insurance Companies: The current limit should be lowered to 25% in 2 years and to 20% in 5 years.
Commission structure based on premium paying term
A positive development for customers is the proposal to fix commissions for the first year based on the policy term:
PPT less than 5 years: Maximum 5% commission for agencies and 6.25% for agents.
5 Year PPT: 10% for agencies and 12.5% for agents.
6 to 8 years PPT: 14% for agencies and 17.5% for agents.
PPT of 10 years or more: Maximum 20% for agencies and 25% for agents.
Impact on businesses and distributors: What’s causing the concern?
The proposed measures to cut down on commissions and operational costs will directly affect the profits of insurance distribution firms.
Stocks take a hit: The moment the proposal was unveiled, fintech platforms like PB Fintech (Policybazaar) and Turtlemint saw a significant drop in their share prices and market valuations, plunging by more than 35%.
Potential loss of interest among agents: As per an IIFL report, the decrease in commissions could lead to a decline in distributor engagement, potentially impacting the volume of new business and fresh capital inflow in the short term.
How will policyholders benefit directly?
Despite potentially impacting the profits of companies and agents, this proposal could bring substantial advantages to regular customers: With lower distribution and management expenses, a larger portion of customers’ premiums in savings policies like endowment or ULIPs will be directly invested, resulting in higher returns upon maturity. By cutting operational costs, companies may be able to lower the prices of insurance products, i.e., premium rates.
Previously, agents were mostly focused on selling new policies. The emphasis from IRDAI now shifts towards policy persistence, offering better advice, and ensuring smooth claim settlements. In the realm of general insurance, the number of complaints lodged on the Insurance Bharosa portal surged from 78,347 in FY23 to 137,361 in FY25, with 69% of these grievances linked to claims. By managing expenses effectively, companies can concentrate more on servicing claims.