Buying an insurance policy could become more transparent and accountable if a new set of reforms proposed by the Insurance Regulatory and Development Authority of India (IRDAI) takes effect.
The regulator has proposed a broad overhaul of the insurance distribution system, with a focus on curbing mis-selling, controlling distribution costs and giving policyholders more information about how their policies are sold.
The proposals are part of IRDAI’s consultation paper, “Recalibrating Economics of Insurance Distribution”, released on September 23. The regulator has invited comments from stakeholders until October 25, 2026. The measures are proposals at this stage and are not yet final rules.
One of the most significant changes could directly affect insurance agents and other salespersons. IRDAI has proposed that when an insurance policy is found to have been mis-sold, the commission earned on that sale could be clawed back.
The regulator also wants the identity of the individual who sells a policy to be linked to it. Details of mis-selling incidents could subsequently be made available through the proposed Public Insurance Registry. The aim is to create clearer accountability for the person responsible for selling an insurance product.
IRDAI’s proposed framework places greater emphasis on whether a policy actually suits the customer’s needs.
For certain life insurance sales above a specified ticket size, insurers would have to document the customer’s needs, suitability assessment and the reasoning behind the product recommendation. Simply obtaining a customer’s signature or consent would not automatically remove the insurer or intermediary’s responsibility if the product was unsuitable.
The consultation paper flags practices such as presenting an insurance policy as a fixed deposit or high-return investment, failing to explain the consequences of stopping premiums, or encouraging a customer to surrender an existing policy and buy another based on misleading return claims.
The proposed rules also seek to cover direct and indirect remuneration, including monetary and non-monetary incentives, within the regulatory definition of commission. This is intended to prevent sales incentives from being structured in ways that bypass commission limits.
The reforms could also change how insurance is sold through banks and non-banking financial companies (NBFCs).
IRDAI has proposed prohibiting compulsory bundling of insurance with loans and other financial products. A lender should not make the purchase of an insurance policy a condition for providing a loan.
The proposal does allow certain packages where there is a specific and demonstrable benefit to the customer. The broader objective is to prevent customers from being pushed into buying insurance they may not need simply because they are seeking another financial product.
The regulator has also proposed banning volume-linked or reward-linked incentives for bank and NBFC employees selling insurance. Such incentives could include contests, milestone rewards, luxury gifts and other benefits that may encourage sales volumes over customer suitability.
IRDAI has proposed moving towards a more differentiated commission structure instead of relying on a single broad framework.
Commission limits would vary depending on the insurance segment, product, distribution channel, complexity of the product and the effort required to sell and service it.
Under the proposal, commission limits for individual life insurance would vary according to the premium payment term. Agent limits could range from 6.25% to 25%, while distribution entities could have limits ranging from 5% to 20%.
The regulator has also highlighted significant differences in distribution costs across the industry. Private life insurers paid an average commission of around 9% of total premium in FY26, while private general insurers paid more than 20%, according to data cited during the consultation process.
The proposed changes could therefore affect insurers, insurance agents, brokers, banks, NBFCs and digital distributors in different ways.
Another major part of the proposal concerns insurers’ Expense of Management (EoM), which covers costs involved in running the insurance business, including distribution-related expenses.
For life insurers, IRDAI has proposed moving to a company-level EoM limit linked to Gross Direct Premium Income (GDPI). The ceiling would be brought down to 15% within two years and 12.5% within five years.
General insurers would see the calculation shift from Gross Written Premium to domestic GDPI. The EoM limit would gradually decline from the existing 30% of GWP to 20% of GDPI over five years.
The regulator’s broader objective is to reduce structural distribution costs and improve efficiency across the insurance sector.
Transparency is another central feature of the proposed reforms.
IRDAI wants insurers and large distribution entities to disclose their commission policies and structures in a simple and accessible manner. Certain commercial insurance policies would also carry commission disclosures.
The idea is to give customers a clearer picture of the costs associated with selling an insurance policy and make it easier to compare products.
The regulator is also proposing a simpler three-tier insurance distribution architecture. The framework would broadly distinguish between Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions for Insurance.
IRDAI’s proposals also place greater emphasis on digital infrastructure.
Bima Sugam and the proposed Public Insurance Registry are expected to play a role in making insurance information easier to access, compare and manage. The regulator sees digital infrastructure as a way to improve transparency, portability and efficiency while reducing transaction costs.
Policyholders could get greater visibility into who is selling an insurance policy, how distributors are compensated and whether a product is appropriate for their needs.
Insurers and intermediaries, meanwhile, could need to adjust their sales practices, incentive structures and distribution models.
The consultation process will determine how the proposals evolve. Stakeholders have until October 25 to submit their views, after which IRDAI will consider the feedback before deciding on the final regulatory framework.
