IRDAI targets rising distribution costs
The Insurance Regulatory and Development Authority of India (IRDAI) has released a consultation paper proposing significant reforms to the insurance distribution model. The regulator aims to curb rising costs that have not translated into broader insurance penetration or better value for policyholders.
The core of the proposal is a five-year glide path to reduce Expenses of Management (EoM). Currently, the EoM limit for insurers stands at 30 percent of premium. Under the new framework, life insurers would be required to lower this to 15 percent within two years and further to 12.5 percent within five years. For general insurers, the targets are 25 percent within two years and 20 percent within five years.
Stagnant growth despite economic expansion
IRDAI’s data highlights a disconnect between economic growth and insurance penetration. While India’s Gross Domestic Product (GDP) grew by 10 percent over the last decade, life insurance business grew at a similar 10 percent rate, and general insurance at 13 percent. However, the number of individual life insurance policies has remained largely stagnant.
New individual policies stood at approximately 266 lakh in FY16 and rose only marginally to 270 lakh in FY25. The total number of individual policies in force remained around 3,270 lakh throughout this period. IRDAI notes that this expansion is insufficient to bridge the protection gap, particularly against the national target of 'Insurance for all' by 2047.
Commission caps and market reaction
The consultation paper also introduces stricter controls on distributor remuneration. For individual life insurance policies, first-year commissions are proposed to be capped based on the premium payment term (PPT):
* **Less than 5 years PPT:** 5% for distribution entities, 6.25% for agents. * **5 years PPT:** 10% for distribution entities, 12.5% for agents. * **6-8 years PPT:** 14% for distribution entities, 17.5% for agents. * **9 years PPT:** 18% for distribution entities, 22.5% for agents. * **10+ years PPT:** 20% for distribution entities, 25% for agents.
Data from the regulator indicates that distribution costs have surged. For corporate agents, new business premium grew by 28 percent between FY23 and FY25, but total distributor remuneration increased by 125 percent. In general insurance, broker commissions rose from 8.5 percent to 17 percent over the same period.
The market reacted sharply to these proposals. On Thursday, stocks of PB Fintech and Turtlemint crashed by up to 34 percent, reflecting concerns over the impact on intermediary profitability.
Focus on policyholder value
IRDAI argues that the current expense structure, which saw private life insurers' total expense ratio rise from 16.5 percent in FY21 to 20.2 percent in FY26, has not delivered expected consumer benefits. The regulator links the proposed EoM reductions to the potential for improved returns in life savings products, as a larger portion of the premium could be allocated to investment rather than operational costs.
However, the success of these reforms will depend on whether insurers pass on savings to consumers through lower premiums or better returns, rather than simply improving their own margins. The regulator also highlighted issues with service quality, noting that life insurers’ 61st-month persistency stood at 48 percent, compared to 71 percent for the online channel. General insurance grievances also rose significantly, from 78,347 in FY23 to 1,37,361 in FY25.