India’s insurance distribution overhaul set to lower costs and reshape industry dynamics

India’s insurance regulator signals a major shift towards reducing sales costs and increasing transparency, with potential to make the industry more policyholder-centric and improve market efficiency.

India’s insurance regulator has put the economics of distribution under the microscope, and the market reaction suggests the industry understands how far the proposed reset could go. In the two days after the Insurance Regulatory and Development Authority of India released its consultation paper, “Recalibrating economics of insurance distribution”, on September 23, two listed insurance aggregators and distributors lost roughly ₹33,000 crore in market value. The paper is still only a draft, with comments open until October 25, but it has already forced a wider debate over how much of an insurance premium is consumed by sales costs before any protection reaches the customer.

At the heart of the consultation is a simple but uncomfortable argument: India’s insurance market has grown too slowly, while the cost of selling policies has grown too quickly. IRDAI says premiums have barely matched gross domestic product growth over the past decade, even as new lives covered have stagnated. The regulator’s concern is that the industry has become dependent on high commissions to push volumes, leaving product quality, claims experience, pricing and service competition in the background. That model, the paper argues, weakens the very scale efficiencies insurance needs to work properly and makes it harder for insurers to expand on retained earnings.

The consultation is also, in effect, a partial audit of the regulator’s own earlier approach. Under the Expenses of Management framework introduced in 2023, insurers were given overall cost limits, with greater freedom to decide how compensation was split across products and channels. According to the paper, that flexibility has not delivered the intended restraint. Instead, commission costs have continued to rise sharply, even after the framework was tightened. The new proposal is therefore far more prescriptive, moving away from broad ceilings towards detailed caps that vary by product, channel, frequency of purchase and the practical difficulty of selling a policy.

That shift could have immediate consequences for some lines of business. Reports from TeamLease RegTech and Business Standard indicate that IRDAI is proposing a staged reduction in allowable expenses, with life insurers moving towards a 12.5 per cent ceiling over five years and general insurers towards 20 per cent. The draft also appears to distinguish between products that are easy to place and those that require greater effort. Third-party motor cover, which is mandatory, would carry no commission for distribution entities, lending entities or garages, while agents and associates would receive 2.5 per cent. Sales in smaller towns could attract an additional 10 per cent commission, recognising the higher cost of reaching those markets. Business Standard also reported steep proposed cuts in some bundled or

For policyholders, the logic is straightforward: if less premium is absorbed by distribution and operating costs, more of it should remain available to cover risk, improve returns in savings-linked policies or reduce prices in pure risk covers. The paper also goes beyond commissions. It calls for cleaner disclosure, including a one-page summary of key product terms before sale, and says customers should not be forced into bundled arrangements when buying home or vehicle finance. It also proposes clearer treatment of claims data in health insurance, arguing that current settlement ratios can mask the scale of rejections and repudiations. If the consultation survives the feedback process and becomes regulation, it could mark one of the most consequential attempts yet to make Indian insurance less sales-driven and more policyholder-focused.