IRDAI weighs commission overhaul to curb insurance mis-selling
What's the story
The Insurance Regulatory and Development Authority of India (IRDAI) is mulling a major overhaul in the way distributors are compensated. The proposed reform, aimed at curbing mis-selling in the insurance sector, suggests paying commissions over the life of a policy instead of large upfront payments. The move is part of a broader review by IRDAI to cut high distribution costs in one of the fastest-growing insurance markets globally.
Upcoming changes
Draft framework to be ready in next month or so
A draft framework for the proposed overhaul is expected to be released in the next four to six weeks, a source familiar with the discussions told Reuters. The staggered commission payments would align India with major global markets such as the US, UK, and Europe. IRDAI's chairperson Ajay Seth had said last week that they were working on a distribution reform consultation paper which could be issued by July-end.
Mis-selling issues
Concerns over upfront commissions incentivizing mis-selling
The Indian insurance sector has been under scrutiny over concerns that hefty upfront commissions incentivize distributors to focus on sales volumes rather than customer suitability. This often leads to mis-selling and customers being pushed into buying policies frequently. Industry executives say distributors can earn commissions as high as 40% of premiums on some life and health insurance products, with a major chunk of it earned upfront.
Market potential
Insurance penetration remains low in India
Despite being one of Asia's largest markets with gross premium collections exceeding ₹11.9 trillion annually, India's insurance penetration was just 3.7% of GDP in 2024. This is lower than the global average of 7.2%, according to Allianz estimates. To make policies more affordable, the Indian government had last year reduced the tax on individual health and life insurance premiums from 18% to 0%.
Pricing reform
Proposed reforms include new pricing model and stricter disclosures
The IRDAI is also considering a new pricing model that links commissions to the effort involved in selling and servicing a policy. This could mean higher commission fees for agents providing face-to-face advisory services, filling out paperwork, and managing claims. Disclosure requirements for agents, brokers, and other distributors are also likely to be tightened under the proposed reforms.