India insurance regulator plans overhaul of commission rules to curb mis-selling, sources say

MUMBAI: India’s insurance regulator is seeking to reform how distributors are paid in an effort to rein in mis-selling, and plans to propose commissions be paid out over the life of a policy instead of in large upfront payments, two sources said.

The revamp is part of a broad review by the Insurance Regulatory and Development Authority of India (IRDAI) and also aims to reduce high distribution costs in one of the world’s fastest-growing insurance markets, according to the sources who have knowledge of the discussions between the regulator and the industry.

“A draft framework is imminent and could be circulated within the next four to six weeks,” said one of the sources, who declined to be identified as the talks were private.

Staggering commission payments would bring India in line with major global markets such as the U.S., the UK and Europe.

The planned proposal to move from large upfront payments in favour of paying out commissions over the life of a policy has not been previously reported.

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IRDAI did not immediately respond to a request for comment.

The regulator’s chair, Ajay Seth, said last week that it was working on a distribution reform consultation paper that could be issued by the end of July.

A sector ripe for reform

Indian authorities have been keen to reform the country’s insurance industry.

There have been concerns that hefty upfront commissions encourage distributors to prioritise sales volumes over customer suitability, resulting in mis-selling and customers being pushed into purchasing policies frequently.

Distributors can earn commissions of up to 40% of premiums on some life and health insurance products, industry executives say, with a significant portion of that gained upfront.

India is one of Asia’s largest markets with gross premium collections exceeding 11.9 trillion rupees ($125 billion) annually. But insurance penetration — measured by the total amount of insurance premiums underwritten in a year — was just 3.7% of GDP in 2024. That compares with an Allianz estimate of 7.2% for the global average.

The government last year cut the tax levied on individual health and life insurance premiums to 0% from 18% to make policies more affordable. It also opened up the sector to 100% foreign direct investment, leading to a further pick-up in interest from overseas companies.

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New pricing model floated

The regulator is also considering linking commissions to a pricing model that factors in the effort involved in selling and servicing a policy, the sources said. The current system largely relies on a fixed commission agreed between an insurer and a distributor.

The model under consideration could reward agents helping customers with face-to-face advisory services, filling out paperwork and managing claims with a higher commission fee than, say, a bank selling policies to customers as an add-on product.

Commissions could also be capped depending on the product, the policy length and complexity, the sources said.

Disclosure requirements for agents, brokers and other distributors are also likely to be tightened, bringing greater transparency to commission and remuneration structures, the sources said.

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India has more than 60 insurers. Major domestic life insurers include state-owned Life Insurance Corp of India, ICICI Prudential and HDFC Life, while ICICI Lombard and Bajaj General Insurance are among the top non-life players.

Foreign firms include Prudential, Sun Life Financial and AIG.