On 23 September, 2026, IRDAI released a consultation paper titled “Recalibrating Economics of Insurance Distribution”. Later, in an interview with The Times of India, Chairman Ajay Seth described its purpose as widening coverage, improving affordability, access in underserved areas and segments, and generating employment. The stated objectives follow from that: ending regulatory arbitrage, drawing more entities and individuals into distribution, lowering the cost of selling insurance, rewarding good market conduct and improving transparency.

Worthy aims; though whether the paper’s proposals can deliver them is another question. The broking community has protested loudly, mainly against the commission caps and the tighter limits on expenses of management (EoM), which hit the industry hardest and have therefore dominated public discussion. Industry voices warn that as many as a million brokers and agents could lose their livelihood within five years. The contention runs against the paper’s objective of widening the distribution network.

A cap on commission and EoM, backed by a mandatory cost audit, would be more defensible than a commission cap alone. Only in 2023, IRDAI freed product-level commissions and tied them to the overall management expense limit. That brought welcome transparency, and we now know that new policies attract very high commissions while renewals earn far less. Fresh caps risk bringing opacity in commission payments, because insurers will keep paying whatever it takes to win business, only less visibly. The paper tries to shut that route by counting incentives, awards and brand payments as commission. Such a rule is easier to write than to police, and the likelier result is more underhand dealing. I see the capping proposal as a step backwards and non-workable. 

The employment argument deserves some attention. The agent network supports about 5.4 million people today, and lower payouts could thin the number of new entrants, brokers have argued, estimating a million lost livelihoods over the next five years. However, I doubt that lower commissions will shrink the business or jobs in the sector. India’s insurance penetration is 3.7% of GDP against a global average of 7.3%, and the untapped potential is estimated at ₹19.33 trillion, or about $222 billion. Unemployment stood near 5% in September and ran higher among those aged 15 to 29. A sector with this much room to grow could absorb far more people than it does today. Further, lower premiums would expand demand, just as lowering of GST did.

Competence Gap
The real problems lie elsewhere, and commissions, capped or not, are secondary to them. Tapping the market begins with better-informed buyers and sellers.

A buyer must first understand why she needs insurance cover at all, and that understanding will create demand. She then needs to know which products exist, which of them suit her circumstances, insurer’s record of custom service and claims settlement. Promotional material seldom tells her any of these.

On the supply side, insurers must design suitable policies and take them to the people who need them. Surveys have shown customers today do their research online but then seek advice from an agent or broker. That guidance is the legitimate role of an intermediary, and it demands sound knowledge of the products. No commission structure can guarantee it. An entry-level licensing exam is not enough either, because competence comes from continuous learning. The regulator should prescribe licences to be renewed every three to five years, subject to a test each time, much as we renew a driving licence.

Mis-selling is usually blamed on bank staff and agents, but it begins with insurers, some of whom sell investment products resembling mutual funds under the label of insurance. At claim time they also find plenty of grounds for rejection, some of them rooted in the buyer’s and seller’s shared ignorance of the policy terms. At the point of sale, most mis-selling happens without ill-intent. Agents are handed a product with little briefing, given steep targets and offered commissions on new policies that run as high as 51%, so they sell what they have, often ignoring customer needs. In bancassurance the commission usually goes to the bank, not to the employee at the counter, who has nothing to gain in selling insurance beyond meeting a target. Blaming a sound model for flaws in how it is incentivised misreads the problem.

The deepest flaw is that commissions favour new policies. Servicing renewals and settling claims earn the seller little, so neither the seller nor the insurer feels answerable to the policyholder, and policies lapse. Other causes include customers who never realised a policy was bundled with a loan or credit card, and those who later find it does not suit them. At such moments an agent is likelier to sell a fresh policy than to persuade the insured to revive the old one, even at the cost of a penalty. For the policyholder a lapse often means losing the premiums already paid, since many lapsed policies return nothing.)

These problems run deep, and capping commission and EoM will not resolve them.

Who Pays
Unlike banking, Indian insurance relies on agents and brokers to reach customers. Insurance is meant to be sold on solicitation, which means the customer must ask for a cover that fits her needs rather than the insurer pushing what it prefers to sell. Insurance products are also complex and need explaining, which is why intermediaries are paid, and commission as that payment is accepted worldwide.

The real question is why it should come out of the customer’s premium. She pays to be protected against risks she perceives, not to fund a seller’s incentive - of up to 51% on a new policy - least of all when the service falls much short of her expectations. But she discovers that only when she files a claim!

Insurers have other sources of money. Float, the premium collected in advance of claims, is invested in government securities and equities, and the income from that investment is large. LIC, the biggest life insurer, earned ₹554.98 billion from investments in 2025-26, and New India Assurance, the largest general insurer, earned ₹111.1 billion. Penalties, administrative charges and reinsurance add more. Why not let insurers pay commissions from such earnings, instead of them paying large dividends to the government that only help plug the fiscal deficit?

Mutual funds offer a comparison. They pay distributors a trail commission out of each scheme’s total expense ratio, calculated on daily net asset value, and not out of the amount invested. The cost does reach the investor in the end as slightly lower returns, but the sum invested stays intact.

A company’s board is better placed than a regulator to judge how much to pay in commission and how to hold costs down. Boards in other sectors do this routinely, and insurance should be no exception. In any case, calculating expenses of management in insurance is complicated. The issue of how to run their business cost efficiently is better left to the management.

Some Suggestions
The market needs sellers answerable to buyers. The way to get there is to let insurers manage their own expenses, commissions included, but invert the logic of commission payment. Commission should rise with each year’s renewal instead of being front-loaded, and a policy closed early should trigger a full clawback of the commission, along with the insured getting back what she has paid so far as premium (the link could better fit here). Sellers would then have a reason to match products to needs, which will reduce the number of mis-selling cases and the insured would stay insured in a real sense. The paper does gesture in this direction, with renewal-linked payouts and clawbacks for mis-selling, which I welcome. The difference lies in keeping incentives transparent and not inside caps.

The regulator should also collect and publish product-wise data along with aggregates, particularly on renewals of life and health policies. That would show what is being sold and why renewals trail new business.

Three further steps would make reach meaningful. i) Bundled and investment-linked policies should carry a genuine insurance cover rather than treating it as an afterthought; ii) Banking correspondents could become one-stop sellers of all financial products in underserved areas, which would give them enough income to survive on low commissions, provided they are trained and certified through graded levels of financial planning examinations; iii) And AI could generate the basic questions a prospective buyer ought to ask, which agents could use to uncover the risks the buyer should cover and to shortlist suitable products for fine-tuning. That guidance would also give sellers a better claim to their commission.

The consultation paper is a good beginning. If technology widens reach and access while informed human advisers guide the insured, the regulator’s goal of “insurance for all by 2047” becomes realistic.