IRDAI may roll out insurance commission caps from January, overhaul distribution rules

India's insurance regulator is considering implementing changes to the insurance distribution system as early as January next year, moving ahead with an overhaul that has triggered a sharp selloff in companies exposed to the sector.

The dates that are being considered are January 1 and April 1, said Girijia Subramanian, an executive with the Insurance Regulatory and Development Authority of India, in an interview as reported by Bloomberg News.

A probably beginning as early as January shows how determined the regulator is to make sweeping changes at selling insurance locally in the country after an earlier liberalization attempt could not improve cost discipline.


Last month, IRDAI proposed capping commissions paid by insurers to brokers and other distributors to reduce costs for consumers and encourage wider coverage. The limits would apply across most insurance categories, including life, health, property and casualty. The regulator is also planning to tighten limits on insurers' management expenses over time.

The proposals have rattled insurance-linked stocks. PB Fintech, the parent of online insurance marketplace Policybazaar, fell 36% when the measures were announced, while Turtlemint Fintech Solutions has lost about half its value since then.

The measures, if become effective, would reduce fee income for online brokers and lenders by up to 90% in categories that are high-margin, according to analysts cited by Bloomberg. Fintech firms are exposed to even higher risks as the new rules further propose a 10% reduction in commission rates for new business. Jefferies said this might translate to an effective 10%-12% fall in earnings.

Industry body, the Insurance Brokers Association of India has signalled warnings that the proposed overall might affect up to 1 million jobs in the sector.

Subramanian, a whole-time member (distribution) at the regulator, rejected any concern that the changes might result in large-scale job losses, as reported by Bloomberg. She added reforms should rather create more employment by making the distribution network much wider and it would become easier for new participants to enter the market.

The regulator has said that commissions have grown faster than premiums since relaxed rules came into effect in 2023, while higher distribution spending has failed to produced expansion in insurance coverage.

Expansion beyond urban markets

The overhaul proposals also include incentive for distributors who make a bid to move primarily beyond the major cities in India. Business from places whose population is less than a million could get an extra 10% of the commission limit and would rise to 20% for towns with less tha 50,000. The regulator has further proposed lower entry requirement and will allow to distributors to conduct other financial and non-financial activities.

IRDAI plans to give insurers time to adjust to tighter limits on management expenses. The reductions would be phased in over five years, with the first interim milestone in the financial year ending March 2029.

Insurers, brokers and stakeholders have time until October 25 to submit their responses to the consultation paper. The regulator will look into the suggestions before issuing draft regulations, Subramanian said. Those rules will be opened for a further round of public feedback before the final framework.

The proposed commission overhaul has parallels elsewhere in Asia. China, in 2023, required commissions paid by insurers to align with rates filed with the regulator, an effective cap.

IRDAI has argued that commission caps require a faster approach than reduction in costs. Phasing them in could encourage distributors to accelerate sales ahead of each reduction, potentially increasing the risk of mis-selling, according to Subramanian.

“There is an earlier-the-better case, but getting the reforms right is more important than getting them early,” she said.