Reducing commissions may help curb mis-selling of insurance products; IRDAI’s role remains crucial
The Insurance Regulatory and Development Authority of India has announced new proposals to limit commission rates for insurance distributors. This move seeks to tackle high distribution costs, ultimately enhancing the policyholder experience. By i...
How much does your life insurance distributor earn from first-year endowment plan premiums? As much as 60%. On Ulips, total payouts can be as high as 40%. In some cases, the maximum commissions paid from first-year life insurance premiums exceed 80%. Also, the average commission rates for retail health—a product people increasingly seek on their own—have gone up from around 10% to 30% between financial year 2022-23 and 2024-25.
The numbers, disclosed by the Insurance Regulatory and Development Authority of India (IRDAI) in its 23 September consultation paper proposing caps on commissions, explain why distribution reforms are high on IRDAI chief Ajay Seth’s agenda. While these figures were known within insurance circles, this is the first time the regulator has publicly acknowledged them while proposing measures to reduce distribution costs.
The incentives attached to selling an insurance policy can directly af fect the policyholder experience, from the quality of advice they receive to the premiums they have to pay, among other things.
“Mis-selling is arising because upfront sales commissions are too high and there is hardly any for persistency. Of the grievances that are received, 40-50% fall within the category of unfair business practices. A large proportion of these would involve mis-selling. Unfair business practice is a broader term, but the number is large,” Seth told The Economic Times in an exclusive interview on 28 September.
In life insurance, the 61st month persistency rate is only 48%, indicating that more than half of policyholders discontinue their policies before completing five years despite heavily front-loaded remuneration.
In general insurance, growing complaints are a key concern. “… increased from 78,347 in 2022-23 to 1,37,361 in 2024-25, with nearly 69% of general insurance complaints on the Bima Bharosa portal relating to claims. The coexistence of high distribution costs, rising premiums and persistent claims-related grievances raises concerns about policyholder outcomes,” the consultation note pointed out. In health insurance, it identified high commissions, concentrated portability and commission-led group business as indicators that intermediary incentives are becoming stronger drivers of market behaviour than customer value, underwriting quality or claims experience.
Also on the table is clawback of commissions in cases of mis-selling, along with making the names of distributors indulging in mis-selling public, to deter misconduct.
“Remuneration is growing four to five times faster than the business it is paid on. This has created a ‘buyer beware’ market in which consumers themselves are expected to decipher complex financial products. Such an outcome is inconsistent with the objective of expanding insurance coverage and requires reforms that realign incentives with customer value,” the paper noted.
Action against mis-selling
Mis-selling of insurance policies has been going on and reported over many years, but of late, the authorities appear to have been sharpening their knives. Many stakeholders in the insurance industry have reacted with shock at what they see as a “drastic” drop in commissions, but this was coming. In February this year, Finance Minister Nirmala Sitharaman warned banks against mis-selling and asked them to focus on their core businesses. The Economic Survey of India, a policy document on the state of India’s economy that the Finance Ministry releases before the Budget, also flagged high distribution costs and “rampant” mis-selling as key problems working against policyholders’ interests. More recently, the Reserve Bank of India put in place a framework to rein in mis-selling of life insurance policies by banks, as well as compulsory bundling of credit life products with loans from 1 January 2027.
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Its Financial Stability Report in December 2025 recommended cost rationalisation for insurers, aligning intermediary incentives with persistency (put simply, renewal rates, which indicate that customers see value in continuing to retain the product) and value to policyholders, and wider adoption of technology-enabled, low-cost distribution models. It has asserted that front-loaded acquisition costs in the life sector are limiting the value for policyholders.
Now, IRDAI is clear that distribution costs must come down to boost customer experience, affordability, and insurance penetration. “Affordability comes under severe challenge as a significant proportion of insurance premiums go towards acquisition costs, thus reducing the risk and savings pools. Consumers ultimately bear these costs through higher premiums and low delivered value,” the paper said.
It has proposed new expense-of-management (EoM) limits to reduce overall costs. For life insurers, the proposed EoM framework sets a glide path to bring expenses down to 15% of premium within two years and 12.5% within five years, with reductions required each year. For general insurers, the corresponding limits are 25% within two years and 20% within five years. The glide path would apply from 2027-28. Insurers whose EoM was already below these benchmarks in 2024-25 would also have to bring it down further—to 10% within five years for life insurers and 20% within five years for general insurers, with 10% envisaged as the sector’s long-term goal for life insurance.
Will policyholders benefit?
The IRDAI chief is clear that they will. “The expectation is very clear: the benefit of cost efficiency should be passed on to customers. This entire exercise is intended to ensure that the public and policyholders benefit. For a life insurance savings product, the outcome should be better returns. In general insurance, it should result in better claim ratios,” he said.
Segar Sampathkumar, former Insurance Ombudsman, Chennai, believes market forces and competition will push companies to pass on the savings from lower commissions to policyholders through lower premiums.
However, others disagree. “The cap on commissions and thereby any reduction in the cost to the customer, is a transient advantage, which will get pulled back from the broad customer base via premium inflation. We have seen that slowly play out in the context of GST withdrawal in individual life and health insurance contracts,” says former Irdai member Thomas Devasia. He adds that ‘forced selling’ will persist unless the RBI and IRDAI prohibit banks and NBFCs from selling insurance to customers who have taken loans from them.
Some insurers believe lower distribution outgo will free up resources to focus on better product design, improved offerings, and a better customer experience overall. Animesh Das, MD & CEO, ACKO General Insurance, which follows a direct-to-customer model, says that the IRDAI has identified malpractices and called them out on the basis of data. “The hope is that insurance companies will now focus on policyholders’ needs by creating easy-to-understand, af fordable products with value-added benefits, supported by the resources freed up through these reforms,” he says.
Distributors are expected to explain product features correctly and recommend products suited to customers’ needs. However, higher commissions from one insurer can incentivise them to push its products even when another offers better value. This is the root cause of mis-selling. “The reforms should encourage insurers to redirect resources towards efficient processes, rather than relying on high commissions to drive sales,” says Das.
However, several industry players believe slashing commissions down sharply will not make mis-selling disappear. “I don’t see a direct relationship between the level of commission and mis-selling. Unscrupulous elements will continue to exist. The answer lies in stronger supervision and inspection, as regulators have done in other areas, rather than assuming lower commissions alone will solve the problem,” says Nilesh Sathe, former member, IRDAI, and Independent Director, Tata-AIA Life Insurance. Even on commission clawbacks for mis-selling, he is not hopeful about any substantial change. “Companies were already taking action against agents for mis-selling. No company wants its reputation to be tarnished, so agents found indulging in such practices are being terminated or blacklisted even now. The industry has mechanisms to deal with mis-selling,” he says.
Insurance brokers and agents—the channels set to be impacted most by the regulations—have also raised concerns whether insurers will pass on the benefits to policyholders. “Is there any evidence to suggest that lower distribution costs will translate to lower premiums? For example, after the reduction in Goods and Services Tax (GST) rates, premiums were expected to come down. They did, but only for a short period. We are now back to square one,” says the head of a digital insurance sales and comparison platform.
Some are convinced that the cost savings will lie with insurance companies. “Not one rupee will reach the customer. Nothing in the paper obliges insurers to reduce premiums by the commission saved. Money will move from distributors and insurers’ own staff to insurers’ shareholders,” says Rohan Dukle, Promoter, Xperitus Insurance Brokers. He also believes the EoM ceiling will hand the industry to a few players, reducing customers’ choice.
“The consultation paper removes the customer’s advocate exactly where the problem lies. IRDAI’s own data shows that 69% of complaints against general insurers are about claims, while 63% of complaints on its own portal are upheld in favour of the customer. The broker is the customer’s representative in those disputes. Yet, the paper pays that representative less than the insurer’s own tied agent,” he says. “Comparing the agent ecosystem in life insurance with the broker ecosystem in general insurance may not provide a complete picture. General insurance requires a different level of product knowledge, technical understanding and continuous servicing,” he adds.
On the health insurance side, the chief challenge is the rising healthcare costs. So, lower commissions may not automatically result in lower renewal premiums either. “With zero GST, we did not see much reduction in health premiums. There is a need to co-ordinate with hospitals and take steps to control costs. Medical inflation is growing at around 14%. Even if you reduce commission, this cost will continue to stay,” says Shilpa Arora, Chief Operating Officer, Insurance Samadhan, a firm that assists aggrieved policyholders in escalating their complaints.
Panacea for all ills? Not quite
Reducing commissions and mis-selling incentives will address only part of the problem. Much depends on how effectively Irdai plays its regulatory role. “Its oversight needs to be stronger and more stringent.
There is a need to strengthen its inspection and supervision capabilities, act faster and impose stiff penalties that can serve as a deterrent against future violations by insurers,” says Sampathkumar. In some cases, action against insurers has been taken only after several years, diluting its effectiveness as a deterrent.
ET Wealth has earlier pointed out how the increasing complaint burden and scarce resources at insurance ombudsman offices have led to delayed hearings, and a complaints pile-up. “There is a need to strengthen the grievance system. Currently, the burden is on the policyholder to keep filing documents at GRO, Bima Bharosa and then the Ombudsman. We still see cases stuck at the ombudsman level, and policyholders have no idea when they will get a hearing. Why not put a date in the system?,” asks Arora.
Finally, until a complete clean-up, policyholders should scrutinise insurance proposals carefully before signing up. “Even while buying a TV or a refrigerator, customers carry out adequate research before the purchase, but unfortunately when an insurance agent tries to explain or sell insurance, people often say they don’t have time; they simply sign the documents, as per the agents’ instructions. Instead, you must spend 15-20 minutes understanding the policy. You can use AI tools to generate a list of the right questions that you must ask before buying a policy,” advises Sathe. Or even to decipher an insurance policy document, if you find its wording complicated. IRDAI has invited feedback from all stakeholders by 26 October 2026. Seth told ET that the reforms could be implemented from 1 January or 1 April 2027.
