IRDA's new consultation paper proposes major reforms to improve insurance distribution and reduce complaints

Irda recently released a consultation paper, 'Recalibrating Economics of Insurance Distribution', which aims to bring structural changes to distributors' commissions, link payouts to policy persistency, eventually reorganise distribution channels, and reduce management expenses.

Parliamentary Standing Committee on Finance, in its report on performance and regulation of the sector submitted in February 2024, noted that India's insurance penetration was 4.2% in 2021-22, compared to global average of 7%. Insurance density - premium per person - was about $91 in India, against global average of $874. Penetration has since fallen to 3.7% (life 2.7%; non-life 1%).

Insurance, unlike other financial products, is a 'push product' that requires concerted and consistent sales efforts to close a contract and service it. Paying huge upfront commissions under deregulated models has failed to drive organic mass-market adoption and provide the essential service of derisking.

Instead, distributors have been incentivised to focus on high-ticket, urban, investment-linked products rather than expanding into semi-urban and rural regions and reaching lower- and lower-middle-class prospects. Irda research has pointed out a disconnect between premium growth and distribution payouts.

Between FY23 and FY25, premiums collected through corporate agents in life insurance grew by 28%, while distributor commissions surged by 125%. In general insurance, broker premiums grew by 37%, while commission payouts rose by 173%. Commenting on this rise in distribution costs, Irda chairman Ajay Seth said, 'Misselling is arising because upfront commissions are too high.'

Skewed compensation in favour of distributors had unintended consequences: insurers bid up distributor compensation to chase the top line without regard for the bottom line, leading to massive capital consumption and eroding profitability of life insurance companies. As a result, the initial enthusiasm of global insurers and Indian corporates to enter India's high-potential market has subsided.

In fact, some international companies have folded, and Indian participants have sold their stakes. Consequently, there are only 70 insurance companies operating in a country of 1.4 bn people, far fewer than in the US and Britain.

The insurance industry has four pillars: manufacturers (insurance companies), distributors, customers, and regulators. Inadequacy of manufacturers and distributors is apparent. Taking insurance cover to every nook and corner and to all insurable persons, and achieving the objective of 'Insure all by 2047' is possible only if this inadequacy is addressed.

India's insurance distribution network, even through brokers and bancassurance, relies on individual agents, who incur travel expenses for customer acquisition, documentation, training and post-sales service. In fact, last-mile human connectivity, particularly for life insurance, makes upfront commission inevitable.

An effective insurance system requires intermediaries who remain engaged after initial sales, especially in life insurance. Policyholders need assistance from salespersons throughout the term of the contract for various services, despite insurers' technological interventions.

Guiding principles of reforms should strike a judicious balance between increasing transparency, driving a massive push for financial protection, offering affordable coverage, delivering genuine service, providing value to policyholders, adequately rewarding insurance distribution, ensuring profitability for insurance companies, and strengthening public confidence.

Heavily skewed compensation towards the first year encourages short-term sales orientation. Low-persistency levels indicate widespread policy discontinuance, partly attributable to inappropriate sales incentives. The approach should recognise the value of ongoing service and responsible policy retention.

During FY26, the Bima Bharosa portal received 2,97,468 complaints across the life, non-life and health insurance segments. Of these, life insurance accounted for the most complaints, at 1,19,027, closely followed by the health insurance, with 1,17,979 complaints. The non-life insurance segment recorded 60,462 complaints.

If the distributor/broker takes responsibility for selling a suitable product that fits a consumer's financial situation, goals, risk tolerance, knowledge and experience, chances of such complaints arising will be minimal.

Proposed changes to insurance commissions are essential to improve penetration, efficiency, credibility and inclusiveness in India's insurance industry, and help deliver greater value to customers. The industry's economic contribution to the India growth story, particularly in channelling large sums of long-term investments for infrastructure building, has been suboptimal. If we leave out LIC, it is not even marginal.

Implementation of a new framework for distribution compensation should enable regulators to assess whether savings from distribution costs are reflected in premiums, policy benefits, claims servicing and investment returns. Design and implementation must include appropriate transitional arrangements to prevent disruption from abrupt changes.