The IRDAI has proposed new limits on agent and bank commissions to reduce policy costs and stop the misselling of insurance products. By capping payouts, which surged to ₹60,800 crore in FY25, the regulator aims to align incentives with long-term policy retention. This move may impact the fee income of banks heavily reliant on the bancassurance model while potentially pressuring profit margins for insurance companies.
The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a structural change in how insurance companies pay distributors, aiming to lower costs for policyholders and curb misselling. The plan introduces strict commission caps for insurance products, a direct response to a trend where payouts have grown much faster than the actual insurance premiums collected.
In the last financial year (FY25), life insurers paid ₹60,800 crore in commissions, representing an 18% increase. However, the total premium income grew by only 6.73%. This gap between rising distribution costs and slower revenue growth has prompted regulators to step in, arguing that excessive upfront payouts encourage aggressive, and sometimes inappropriate, sales tactics.
The proposed rules specifically target the bancassurance model, where banks sell insurance to their loan customers. Currently, some products pay commissions exceeding 40% to these banking channels. Under the new proposal, these could be restricted to a range of 5% to 20%. For health insurance, a key growth area, the regulator suggests capping first-year commissions at 15%, significantly lower than the current practice of over 30%. These changes may lead to a squeeze on fee-based income for banks that have historically viewed insurance sales as a high-margin revenue stream.
Beyond cost control, the IRDAI is tackling the issue of misselling, where insurance is often bundled as a mandatory requirement for loans. The proposed framework prohibits banks from forcing insurance purchases and demands clearer disclosure of costs when interest rates are linked to policy purchases. To ensure this does not hurt market growth, the regulator has introduced a reward system, allowing distributors to earn an additional 10% to 20% commission for selling policies in underserved rural regions.
The proposal is currently open for feedback until October 25. For investors, the long-term impact remains to be seen. While lower commission payouts might theoretically allow insurers to pass on savings to customers through lower premiums, it is unclear whether companies will choose to lower prices or retain the difference to support their profit margins. Moving forward, shareholders may need to track how banks adjust their revenue models and how insurers manage the potential impact on their distribution networks and new business growth.