Insurance Distribution Reform: Case for Calibration, Not Compression?

Can tighter distribution economics improve insurance penetration—or put growth at risk?

IRDAI’s consultation paper on insurance distribution reforms has created intense debate already; the moot point being whether tighter economics will slow reach in an underpenetrated Indian market, or whether they will force a more efficient customer-centric model that can expand it. The paper is directionally consistent with the regulator’s commentary over recent months around misselling, high expense levels of insurers and the need to balance customer centricity with increased insurance penetration. It’s just that the scale and timelines of the proposed expense reduction and prescriptions on distributor commissions have caused some surprise to stakeholders – and the markets.

Here is my perspective.

Context

First, among all the noise and fury in the media, three points need to be highlighted upfront for better context (especially for those not from insurance sector):

a) Insurance is fundamentally a different product v/s other investment avenue addressing distinct customer needs – this holds true even for savings-oriented Life Insurance products. While regulatory and policy learnings from other financial sectors like Banking and Mutual Funds are important, it is critical to adapt rather than copy those in the Insurance context.

b) At its core, the insurance customer buys a promise from the insurer to pay in future in case of any eventuality and hopes that eventuality does not arise. It is for this reason that insurance has been a “push” product (while for certain categories like Term and Health, one can see an increase in the customer “pull” especially after COVID).

c) While the distribution channel structure is similar and some challenges exist across the sector, selling and servicing a Life Insurance policy is different from retail General Insurance (GI) products like Motor and Health, which in turn need a completely different approach vis-à-vis other GI lines like Fire, Property and Commercial Lines.

While discussing the issue, it is important to understand nuances of each product line and not generalise any product/channel-specific issues across the insurance spectrum. E.g.,

a) Forced bundling for loan-linked products and instances of misselling a long-term Life Insurance policy as a short-term one are issues in Life Insurance. General Insurance contracts are annual.

b) Claims experience is the dominant issue in Health Insurance.

c) Disproportionate leverage at OEM dealers for new Motor policy is an issue for Motor.

High Expenses of Management and distribution costs are the issues across the sector, but this may not be the only cause for all ills plaguing the sector.

While the end state is Customer benefit in terms of Price and Quality, at the same time the insurance distribution model needs to be economically viable and sustainable in the long term.

The Praxis report on General Insurance—and the common themes

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The recently published Praxis report on General Insurance puts numbers and customer insights behind many of the concerns now reflected in the consultation paper. Some of the themes do apply to Life Insurance (LI) as well.

• More than 80% of insurance business is intermediary led. Customer ownership primarily rests with intermediaries than insurers. Globally in developed markets like US, insurers have pivoted to D2C models to augment the traditional intermediary-dominant structure.
• 83% of customers find products complex and hence depend on intermediaries for helping them choose the right product/insurer and expect the intermediary to support during any claims. However, gaps exist in the intermediary experience. Customers buying direct reported roughly 30% higher satisfaction.
• In Motor, annual customer churn is over 50%; and only about one-third of customers recall their insurer’s name.
• Scale has not led to operating leverage and better economics in Indian general insurance. Combined ratios remain above 100% indicating challenges in technical underwriting discipline. Underwriting losses at nearly 13% of net written premium, while investment income contributes about 21%, underline the dependence on treasury income for achieving profitability. Internationally, leading insurers have demonstrated underwriting profits consistently.
• Growth in commission has outpaced growth in premiums – for both PSU and private general insurers. Here, it is important to note that while the IRDAI paper compares FY23 levels with FY25, the correct comparison would be FY24 vs. FY25. In FY23, IRDAI came up with the Expenses of Management (EOM) guidelines which gave flexibility to insurers to design their commission structures subject to overall EOM caps. This also resulted in reclassification of some distribution-related expenses prior to FY23 as commissions. Hence the FY24 numbers would largely reflect the true commissions level being paid.
• The 2023 regulation also enabled active redistribution of expense headroom across segments. Lower-cost, bulk (and often, low return) business segments like Crop, Group inflated the denominator creating space for higher distribution spends in competitive retail segments.
• The study drew on a survey of 1,200+ consumers, in-depth interviews with industry leaders, public disclosures (IRDAI, GIC, Insurers, international markets).

The common thread is clear:

Distribution reform should improve efficiency, quality and reach—not merely redistribute economics between insurers and intermediaries.

Too much distribution effort and cost go into transferring existing policyholders between insurers instead of bringing previously uninsured people into the pool. Each renewal behaves like a new acquisition – often commission driven, limiting the ability to benefit from prior customer acquisition. This prevents the accumulation of customer lifetime value at the insurer level.

IRDAI consultation paper - the positives:

The basic objective of the IRDAI consultation paper—putting customer interest at the centre and building trust to improve insurance penetration through an efficient distribution engine — cannot be faulted. Having said that, distribution economics differ by channel and product: effort required, product complexity/tenure and mandates, renewal servicing and the risk of misselling or forced selling all need to be recognised – the notably comprehensive paper addresses these issues clearly. Coming to specifics, some positives are:

Allowing insurers to sell products of their group entities and non-competing products within the insurance space is an enabler that needs to be watched. As for now, insurers will focus on reworking their core business models, how much this enablement takes off remains to be seen. Or is it the regulator testing the waters for Composite licensing down the line?

Points to ponder

The proposals are disruptive for the industry, and the insurers and intermediaries will need to fundamentally realign their business models and, in a sense, go back to basics. While the clear directional positives in the paper are mentioned above, the devil lies in the details. There are some areas where more stakeholder feedback will need to be incorporated and the long-term holistic impact analysis undertaken will need to be revalidated.

a) Regulatory policy stability

Overall, the Insurance sector has seen many regulatory interventions over the past couple of years. While the regulator has all the rights and indeed, it is its duty to course correct if required, regulatory policy stability also is important.

In the current context, as explained above, while the 2023 EOM regulations moved the pre 2023 prescriptive regulatory stance to a more enabling stance, now the clock has turned back and with more stringency.

We hope that the new regulations, when finalized, stay for at least 5 years or so without any fundamental change in the structure. Insurers, intermediaries and related businesses plan their business models on certain assumptions and if the core assumptions change, it could lead to an existential issue for some of them. Also, when the FDI norms are now liberalized to allow 100% FDI, frequent regulatory shocks undermine business confidence and can impact investment flows in the sector and beyond. The regulator needs to take extra effort in convincing investors on this front.

b) Is there an alternative regulatory architecture?

There is a credible alternative to a detailed regulatory price list for every product-channel combination: retain entity-level EOM caps as the primary cost constraint, use Ind AS 117 reporting to make acquisition economics and loss-making cohorts more visible, and strengthen board accountability, channel-level disclosure and conduct supervision. An EOM envelope regulates the aggregate cost borne by policyholders while allowing insurers to recognise genuine differences in advice, acquisition and servicing effort. It also reduces the risk that capped commission simply migrates into marketing, lead-generation or productivity-linked fees.

But EOM and Ind AS are not substitutes for conduct regulation. Accounting can reveal economics; it cannot determine whether advice was suitable, a sale was forced, or captive access was abused. The stronger model may therefore be EOM plus product- and channel-level regulatory reporting, suitability and needs analysis, disclosure of conflicts, persistency- and claims-linked remuneration, and clawbacks for proven misselling.

There could be another alternative which balances the core objectives with flexibility to stakeholders, thereby allowing market forces to play out - have an overall EOM framework with segment-level (e.g., Motor, Retail/Group health etc.) EOM caps rather than prescriptive product-level commission caps.

Additionally, prescriptive commission caps can be reserved for demonstrably conflicted products/channels such as loan-linked products, mandatory TP or certain point-of-sale arrangements like OEM dealers.

c) What do other markets do?

International practice is not uniform. The US generally relies on licensing, insurer supervision, compensation disclosure and suitability or best-interest duties rather than universal product-level caps. At the other end, China uses a more prescriptive “filed equals actual” approach in bancassurance; reported average commissions fell by about 30% after tighter enforcement. Thailand also retains explicit ceilings—generally around 40% of first-year life premium and 18% of non-life premium.

Singapore and Malaysia offer a particularly relevant middle path. Singapore limits front-loading for regular-premium life business: only 55% of total variable remuneration can generally be paid in year one, with the remaining 45% spread over later years, alongside quality-linked scorecards. Malaysia has pursued gradual deregulation of operating-cost controls while requiring Balanced Scorecards that link intermediary remuneration to suitability, policy servicing, persistency, complaints and professional conduct.

The lesson is not that India should copy one market, but that regulation can target timing, conflicts and outcomes without fixing every price.

Specific comments on the IRDAI consultation paper

All Insurers:

1) The framework should distinguish among direct-to-consumer models, proprietary and agency channels, point-of-sale persons, banks and brokers from a perspective of their roles in the entire value chain – beyond selling.

• While the current proposals categorize intermediaries into IDE (entity) and IDP (persons), there are nuances in intermediary types within each category. E.g., Banks and brokers have been clubbed under IDE. Banks have an existing customer base from their core Banking business, who they cross sell to, and are generally not involved in servicing; however, insurance brokers (non-OEM) often have to build demand to acquire and then service customers – acknowledging this difference is necessary. In that sense, Broker is closer to an Agent in terms of the overall roles performed. The hierarchy of commissions should reflect such nuances.
• Agents and POSPs, meanwhile, are both individuals performing distribution activity and should receive broadly similar treatment, whether under the Insurance Distribution Entity framework or otherwise.

2) There is a case to differentiate insurers by size and vintage on the EOM glide path. A new insurer is bound to have higher expenses initially on infrastructure, technology, people etc (even if assuming that the product commissions are same for all). Moreover, the regulator itself has granted licenses based on the 5-year business plans which had assumptions basis the previous regulations. To suddenly change the core assumptions while holding the new insurers accountable to the new expense caps may not be fair.

3) Lower overall commissions would ensure that commission-driven competition intensity will reduce but does that address concerns around right advice, service and seamless customer experience? No. Priority should be given by all stakeholders to implement processes and metrics around these core concerns. Else the worst case that can pan out is industry degrowth without any significant improvement in Quality.

4) While the paper talks of placing the information on incidences of misselling and fraud in public domain as a part of performance of the concerned seller, fraud is a risk across the ecosystem - e.g., in Health, collusion amongst customers, doctors, hospitals. These actors also need to be held accountable and called out in public domain with consequent strict action. This will need co-ordination with stakeholders and ministries beyond IRDAI and FinMin.

5) The regulator needs to ensure that these interventions do not move away from the principle of “Ease of Doing Business” and do not cause onerous compliance burden and costs on Insurers. Their focus has to be now on fundamental realignment of their business and customer experience models. Compliance must reflect how distribution businesses actually operate: earnings often combine product-level commission with broader productivity and quality-linked compensation, making rigid product-level attribution difficult.

Life Insurance:

The figures on commissions on Life Insurance products (average and maximum %) quoted in the IRDAI paper strengthen the case for shifting incentives away from front-loaded acquisition and towards renewals and long-term persistency.

1) Directionally, the relatively higher commissions for longer Premium Payment terms and Term products are aligned with the customer and insurer interests. But the low commissions for Pension products can be revisited as Retirement Planning is a critical need gap.

2) Also, while the first-year new business commissions have been reduced across the board, there is an opportunity to make persistency-linked renewals commission disproportionately high, including meaningful remuneration after the fifth or tenth policy year. The main challenge is that half the premium runs off by the fifth year. Hence a minor tinkering here will not serve the purpose of long-term retention which creates a far outsized value to all stakeholders compared to any corresponding incremental expenses. Focus on retention will also nudge all insurers and intermediaries to monitor and improve the quality of sale at the onboarding stage itself.

3) The concern around forced bundling for Credit life policies has been addressed through a commission level barely enough to cover the administrative costs. The logic is unimpeachable that the customer should have choice of either taking a separate Term cover or a Credit life through an insurer of his choice. However, the risk is that the customer may make a choice (maybe out of affordability issues) of not taking any cover at all and risk the loan remaining unprotected. This will be a disastrous unintended consequence and hence the sales process should clearly alert the customer around this risk.

Health Insurance

The scale is now substantial, and Health is the largest segment within General Insurance. Health accounted for about 41.4% of non-life premium in FY25 and grew 9.2%. General and health insurers paid approximately ? 94,248 crore across 3.26 crore health claims; around 58% of claims were cashless. While the positive stories of claims do not find commensurate mention in media, claims remain the defining trust issue—69% of general-insurance grievances were claim-related – claims rejection / lesser amount being paid / experience at time of cashless approval and hospital discharge.

1) More than commissions, the central issue here is the seamless management of the hospital-insurer ecosystem and the high claims costs due to medical inflation. The priority has to be fixing this on a mission mode. Else the pricing for the customers will not reduce despite reductions in expenses and commissions.

2) Health will need investments in technology/AI for efficient processes and superior claims experience. Hence a segment-level (Retail, Group separate) expense cap could suffice rather than product-level commission caps.

3) If the product-level caps are finalized, there is a case to encourage super top-up plans. Super top-ups combined with a robust base plan is a credible alternative to high Sum Insured plans. These plans are affordable and customer-friendly but not sold commonly by intermediaries due to lower premiums and consequently lower absolute commission. The treatment here could be on the lines of Term product in Life.

4) Renewal servicing deserves greater recognition and the significantly lower Renewals commissions and the differential between IDP and IDE may not be warranted for renewals (excluding Porting).

5) Hospital-linked distribution should be approached carefully given potential conflicts of interest, collusion and fraud. While global integrated Health Assurance models exist, caution is warranted in India.

Motor insurance

Motor generated about one-third of non-life premium. The consultation paper estimates that OEM-linked brokers and motor insurance service providers (MISPs) generated one-third of this premium at an average 25% commission.

1) For new vehicles, it proposes nil remuneration on third-party premium for OEM-linked brokers and a 5% ceiling on own-damage and related covers. This direction is understandable, provided administrative costs are covered. IDPs get a higher commission but much lower than prevailing rates.

2) For older vehicles, renewal distribution still needs adequate reward because uninsured rates remain material at around 50% especially in two wheelers in upcountry locations. While the logic of low effort / low commission structure for TP is sound in view of its mandate, enforcement must tighten in parallel.

3) Insurers need to double down on creating value and build strong brands in a highly commoditised product. Incorporating value-added services and building meaningful customer value at every touch point of the car journey is the need of the hour.

CALIBRATION, NOT COMPRESSION

Overall, the data validates IRDAI’s concerns—but argues for forceful calibration rather than blunt compression. India’s insurance penetration remains only 3.7% of GDP—2.7% for life and 1.0% for non-life. A balanced architecture could retain a credible EOM glide path, use Ind AS and granular regulatory disclosures to expose product and channel economics, link remuneration to persistency, claims and service outcomes, and reserve hard commission caps for clearly evidenced market failures. That would protect customers without weakening the economics required to expand coverage.

 

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