Fresh curbs on insurance commissions likely as expense breaches mount in FY25

Less than two years after IRDAI scrapped product-wise commission caps, regulators warn rising distribution costs are inflating premiums. RBI’s Financial Stability Report too echoes concerns. A council-level committee is reviewing compensation norms as breaches surge, sparking debate on reinstating ceilings. In FY25, several life and non-life insurers exceeded expense limits, seeking regulatory forbearance amid mounting scrutiny.

“A committee has been formed to review distribution compensation in the insurance industry amid concerns that commissions have surged sharply since the removal of caps, with discussions underway on whether ceilings should be brought back,” said a source close to the development. “No decision has been taken yet, but the debate has intensified after commission payouts in the sector rose in FY25.”

Under the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, insurers are required to operate within expense caps linked to product structure, premium-paying term and the duration of business. In FY25, many insurance companies breached the limit. In the life insurance segment, only 17 of the 25 insurers stayed within the prescribed limits, while eight exceeded the thresholds on an overall basis across participating, non-participating and linked products.

Industry executives say the discussion is not about reverting to the earlier regime, but about designing a new framework. They say that going back to product-wise commission caps would be a step backward, they argue, given changes in product design, persistency norms and distribution economics.

Executives say data shows a positive correlation between high first-year commissions and mis-selling complaints in the first policy year. While insurers believe that reasonable commissions are necessary to improve insurance penetration, they also say that overpaying distributors encourages aggressive sales practices, benefiting intermediaries while policyholders and insurers bear the long-term cost.

In life insurance, total gross expenses of management rose to Rs 1.38 lakh crore in FY25, which was close to 15.6% of total gross premium. Commission payouts increased 18% to Rs 60,800 crore, significantly outpacing premium growth of 6.73%, underscoring the industry’s continued reliance on commission-led distribution even as regulatory oversight tightens.

Within the general insurance space, 15 non-life insurers breached the expenses of management limits and have sought regulatory forbearance, which the regulator in the annual report has said is under examination. Gross commission expenses of general insurers was at Rs 47,266 crore in FY25. Private general insurers accounted for the bulk at Rs 30,498 crore, followed by public sector insurers at Rs 9,335 crore and standalone health insurers at Rs 7,365 crore of the total commissions paid. While aggregate operating costs moderated marginally, commission payouts remained elevated relative to premium growth.