Linking Payouts to Sales Effort

The Insurance Regulatory and Development Authority of India (IRDAI) is proposing a new system for insurance commissions. This plan would link payouts more directly to the effort involved in making a sale. It moves away from recent broad deregulation and is driven by concerns over rising distribution costs that affect how accessible insurance is and the value for policyholders.

Tackling Soaring Costs and Stagnant Penetration

Cost Growth

The IRDAI is considering an effort-based commission system to address distribution costs that are growing too fast. In the fiscal year 2025, commission payouts jumped by about 18%, significantly more than the 6.7% growth in premium collections.

Regulatory Concern

This widening gap has drawn attention from IRDAI and the Reserve Bank of India. The RBI has pointed to high-cost distribution strategies as a structural concern for the sector's long-term stability.

Penetration Goal

The main goal is to increase insurance penetration, which has remained around 3.7% of GDP, well below the global average of 7.3%. By tying commissions more closely to the time, resources, and expertise needed for each sale, the regulator hopes to make insurance more affordable and accessible to more people.

Channel Background

Historically, sales in India's insurance sector relied heavily on agents, with the Life Insurance Corporation of India sourcing about 95% of its business this way. Private insurers have increasingly used bancassurance (partnering with banks) and digital platforms. Bancassurance is often favored for its cost-effectiveness, using existing bank customer relationships. Web aggregators have also helped by making it easier for consumers to compare policies, improving market transparency and competition.

Previous Reforms

This current proposal follows IRDAI's 2023 decision to remove specific commission caps and move to an overall Expenses of Management (EoM) framework. However, this flexibility seems to have led to continued increases in distribution expenses. The commission expense ratio for Indian life insurers rose to 6.86% in FY25 from 6.21% a year earlier, showing that acquisition costs remain high. The lack of progress in insurance penetration, despite overall premium growth, highlights the sector's struggle to translate market expansion into wider financial inclusion.

Challenges for Distribution Channels

Impact on Channels

The move to "effort-based" commissions could create uncertainty for distribution methods that involve less direct customer interaction. Digital platforms and bancassurance, which have benefited from operational efficiency and wide reach, might face pressure if their "low-touch" approach is considered less "effortful." This could require them to fundamentally change their cost structures and how they incentivize sales.

Agent Concerns

For agents who currently rely on substantial upfront commissions, a shift towards more spread-out or trail-based payouts could reduce their immediate earnings. This might affect morale and make the agency channel less appealing.

Implementation Hurdles

Defining and accurately measuring "effort" across various insurance products and customer needs is a complex task. Regulators will need to establish clear, objective standards to prevent new issues from arising or unintended consequences that could slow down innovation or push sales pressures elsewhere.

Risk of Slowdown

There's a risk that a strong focus on controlling costs could unintentionally slow down the acquisition of new customers or limit the reach of insurance to underserved groups if the distribution process becomes too complicated or less profitable.

Next Steps and Broader Goals

Consultation Paper

IRDAI is preparing to release a consultation paper on these proposed changes. The insurance industry expects this could reshape how distribution economics work.

Bima Sugam Link

This initiative is part of broader regulatory efforts, including the development of the Bima Sugam digital insurance marketplace, which aims to make insurance more accessible and transparent.

Overall Aim

The main objective is to build a more sustainable and inclusive insurance sector that balances the interests of policyholders, intermediaries, and insurance companies.