IRDAI insurance commission curbs: Why the industry is facing a reckoning

To understand the shock over IRDAI's consultation paper on reforming various aspects of the insurance sector, including commissions, go back a decade, to when caps were first set product by product. Insurers paid brokers, agents and corporate agents more than the caps allowed. The industry had a name for it: overriding commission (ORC). Everyone knew, including the regulator.

The reason, or so the industry believed, was too few distributors. Licensing was strict and onboarding slow, so everyone competed for the same limited pool by paying more. IRDAI's fix: make onboarding easier. Point-of-sale person (PoSP) allowed insurers and brokers to certify sellers directly, without a full licence. Car dealers got Motor Insurance Service Provider (MISP) status for a different reason - they sold high-cost car insurance to a captive audience with little regulatory oversight, so costs and commissions ran wild. MISP brought them under some governance.

Neither worked. Brokers realised a PoSP tied to them could sell multiple insurers, unlike one tied to an insurer. Pulling agents onto broker platforms meant scale, and scale meant leverage. Private capital noticed the same thing, poured in, put an app on top, and called it insurtech. The real product was commission arbitrage.


Car dealers evolved too. Manufacturers built their own broking arms, told dealers they'd earn less on cars, more on insurance. Some coerced buyers into taking that insurance, refusing to release the car or honour a cashless claim otherwise. A customer who'd paid lakhs and was waiting on delivery had no real way out.

Aggregators brought a new ORC channel: call centre incentives, paid to push whichever insurer paid most. Banks pushed unsuitable products. Over half of bank-sourced policies lapse within 5 yrs. By then, the commission's collected and the salesperson's moved on.

Every fix meant to expand or regulate distribution got turned into a new way to extract ORC. So, the industry built ways to pay it. You can't legally pay beyond the cap - so you need financial innovation.

Sister concerns sprouted. Some of the largest distributors ran 8 to 10 linked companies, just to collect ORC through them. One large bank sold its stake in an insurer at a high price, then bought a much bigger stake back weeks later for a fraction of it. The regulator later ruled the share pricing itself was a way of paying commission. The simplest loophole was the invoice - call centre bills, training bills, marketing bills, for services never delivered. Insurers went along willingly, competing to build the cleverest structure.

Regulators responded with circulars, warnings, fines. Cost of doing business.

Then, in 2023, tax authorities got involved. A regulatory breach is one thing, a CFO facing tax fraud charges over fake bills is another. The industry needed a fast, reputational bailout.

IRDAI scrapped product-level caps, and replaced them with one overall expense of management (EoM) limit, so ORC could be paid as legitimate commission.

The industry found a new gap. EoM was set as a percentage of total premium. So, insurers wrote bulk corporate and government business cheap, sometimes at a loss, which raised their allowed spending. That extra spend flowed into retail commissions. Corporate buyers got discounts; retail customers footed the bill. All legal.

Now the caps are back, tighter, with more disclosure and governance rules, closing almost every loophole.

Is this harsh? Maybe. But the counter-arguments don't hold up.

Penetration IRDAI's data shows insurance penetration fell from 4.0% to 3.7% of GDP (FY23-FY25). Life penetration alone from 3.0% to 2.7% - even as commissions exploded. Motor commissions up 259% against 34% premium growth, brokers up 173% against 37%. India is deeply underinsured, in a fast-growing economy. Penetration should be rising. It isn't even keeping pace with GDP. Something underneath it is broken.

Livelihoods Doesn't hold. You wouldn't accept a loan with 5 extra points of interest to fund DSA who sold it, or pay ₹300 for a ₹100 product to protect someone's job. Not if you were actually asked.

Investor confidence ₹1.3 tn vanished from insurance stocks in a single day. But the market wasn't panicking, it was discriminating. Banks with more insurance income in profit fell harder - one bank at 12.5% of profit from insurance fell 4.6%; one at 0.6% barely moved. The bank that didn't exploit customers held its ground. Capital rewards what it sees quickly. Maybe it needs to read the room, not just the spreadsheet.

An industry that doesn't self-regulate and doesn't prioritise the end consumer will get what it gets. This was coming. Asking for trust again, right now, is a hard ask to make with a straight face.