The Insurance Regulatory and Development Authority of India’s consultation paper on “Recalibrating Economics of Insurance Distribution” comes at an important stage in the development of India’s insurance sector. The proposals cover commissions, Expenses of Management, distribution structures, incentives, suitability, disclosure, bundling and digital infrastructure. Taken together, they amount to a significant examination of how insurance is sold and how the economics of distribution influence the interests of policyholders.

The industry response has been strong. Brokers, automobile dealers and other intermediaries have raised concerns about employment, insurance penetration, customer access and the viability of existing distribution models. These concerns deserve consideration. Many other corporate distributors have started their policy outreach to present their points.

The consultation also needs to be considered against the experience of the existing system. IRDAI’s analysis indicates that distributor remuneration has grown substantially faster than premiums in several segments between 2022-23 and 2024-25. That divergence warrants a closer examination of the incentives embedded in the distribution model and the value being created for policyholders.

The consumer has to be part of the economics

The central question is how distribution remuneration translates into customer outcomes. Distribution performs an important function. Agents and brokers educate customers, assist with documentation, provide servicing and often support policyholders during claims. Remuneration for these functions is legitimate. The concern arises when the economics of acquisition become more important than the quality and persistence of the policy.

The numbers cited by IRDAI make this difficult to ignore. In the corporate-agency channel for life insurance, distributor remuneration grew 125% between 2022-23 and 2024-25 while new business premiums grew 28%. In general insurance, the regulator has identified similar divergences across products. Motor insurance provides a particularly striking example, with commission growth substantially exceeding premium growth over the period.

Life insurance adds another dimension. First-year remuneration can be considerably higher than the economics available later in the policy lifecycle. Where persistence remains weak, this creates a structural question about whether incentives are sufficiently aligned with a product that is meant to provide protection or savings over many years.

Bancassurance deserves particular attention. Banks account for a significant share of insurance distribution, and the economics can vary materially depending on whether a bank has one insurer relationship or several. Group credit-life products present another area for scrutiny because the insurance is often sold alongside a lending transaction, where the customer may have limited understanding of the alternatives available.

These issues make consumer protection central to the consultation. A customer buying insurance should understand the product, its costs, exclusions, duration and alternatives. A borrower should have clarity about insurance attached to a loan. A motor customer should have a meaningful choice. A policyholder should not discover the limitations of a product only when a claim is made.

The industry is now invoking consumer interest in opposing aspects of the proposed changes. That argument should be taken seriously, but it also warrants evidence. If existing distribution economics are necessary to protect consumers, the industry should be able to demonstrate their contribution to persistence, servicing, claims outcomes and customer satisfaction.

Smaller Markets Need Targeted Distribution Economics
There is an equally important reason to avoid a uniform approach to distribution economics. India’s insurance market has significant geographical disparities. The cost and effort involved in reaching and servicing a customer in a large metropolitan market can be very different from those involved in reaching a customer in a smaller town or rural district.

Digital distribution may not reduce some of these costs, but it cannot eliminate the need for local trust, customer education, documentation and assistance in every market. A regulatory framework that reduces distribution economics without recognising these differences could make insurance less viable precisely where India needs greater insurance penetration.

SEBI provides a useful regulatory precedent. Its current mutual-fund framework provides an additional commission for distributors who onboard new individual investors from B-30 cities. For lump-sum investments, the additional commission is 1% of the first application, subject to a maximum of ₹2,000, provided the investor remains invested for at least one year. For SIPs, the additional commission is 1 per cent of the investment during the first year, also subject to a ₹2,000 ceiling. The mechanism is subject to clawback provisions and is funded from the amount set aside for investor education, awareness and financial inclusion.

The important principle is targeted rather than blanket support. The incentive is attached to genuinely new participation from an underserved segment and carries a condition that discourages short-term acquisition.

IRDAI could consider a similar outcome-linked mechanism for insurance. Additional distribution economics could be available for genuinely new policyholders in underserved towns and rural markets, subject to persistency, servicing and clawback conditions. This would recognise the public-policy objective of extending insurance without preserving high distribution economics across the entire market.

Product Complexity Should Influence the Framework
Insurance products also differ significantly in complexity. Motor insurance, term insurance, health insurance, group credit life and long-duration savings products involve different levels of advice, customer education and post-sale service.

Distribution economics should therefore reflect the work required rather than simply the channel through which a policy is sold. A mandatory motor policy sold alongside a vehicle involves a very different customer interaction from a long-term protection product where the distributor has to assess a family’s needs and explain the consequences of inadequate cover.

Product design also deserves closer regulatory attention. If a product becomes commercially attractive to a distributor because of its remuneration structure, that can influence what customers are shown and how alternatives are presented. Suitability rules need to address this conflict.

Training and qualification standards are necessary, but they should be accompanied by better customer information and stronger accountability. More complex products should carry higher standards of explanation, documentation and suitability.

IRDAI’s proposal to simplify the distribution architecture into Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions can assist supervision. Digital infrastructure such as Bima Sugam and the proposed Public Insurance Registry could also improve comparison, transparency and access if implemented with appropriate safeguards.

One Customer Needs Coordinated Regulation
The intersection of banking and insurance is another area where policy attention is required. Banks are major insurance distributors, while RBI supervises the banking institution and IRDAI supervises insurers and insurance intermediaries.

The customer, however, experiences a single transaction.

If a bank employee sells an unsuitable insurance product, accountability should be clearly established across the bank, insurer and salesperson. Regulatory boundaries should not leave the customer trying to determine which institution is responsible.

RBI and IRDAI should develop stronger common standards for bank-led insurance distribution. Salesperson identification, suitability assessments, policy replacement, complaint patterns and repeat instances of poor conduct should be available for supervisory review. Where an institution repeatedly produces poor customer outcomes, that pattern should influence its supervisory treatment.

There is also a question about the deterrence value of enforcement. Regulatory penalties have to be meaningful enough to alter institutional behaviour. Where the financial consequences of a violation are relatively small, they can become another cost of doing business, particularly for large banks and insurers. A modest penalty can be economically insignificant compared with the cost of obtaining specialist legal advice, while listed companies may see little sustained market consequence when investors remain focused on growth, valuations and future earnings. If enforcement is to change behaviour, the consequences of misconduct have to be proportionate to the economic benefit derived from it and sufficiently certain to influence management decisions.

This matters because India already has extensive regulation around conduct and grievance redressal. IRDAI’s Bima Bharosa provides a centralised mechanism through which policyholder complaints can be registered, tracked and monitored. The next challenge is to use such information more systematically as a supervisory tool. Repeated complaints should become evidence about business practices rather than remaining individual cases to be closed.

The Test Will Be Enforcement
The consultation contains several proposals that could materially improve accountability, including restrictions on incentives, greater disclosure, salesperson identification and clawbacks for proven mis-selling. Their effectiveness will depend on implementation.

There is also a risk of regulatory arbitrage. If formal commissions are reduced, remuneration can migrate into bonuses, marketing arrangements, preferential products, service contracts or other commercial mechanisms. The regulator will therefore need to follow the underlying economic incentive rather than only the label attached to a payment.

This requires stronger supervisory capability. IRDAI needs the ability to identify unusual remuneration patterns, link distributor economics with customer outcomes and detect repeat instances of poor conduct. Proven mis-selling should have meaningful financial and regulatory consequences. Individual accountability should accompany institutional accountability.

The industry’s concerns about employment, access and servicing should form part of the evidence considered by IRDAI. But the same evidence-based approach should apply to claims that existing distribution economics are necessary for consumer welfare.

Insurance for All Needs a Broader Measure of Success
The long-term objective of Insurance for All cannot be measured only through premium growth or the number of policies issued. Insurance penetration matters, but so do adequacy of cover, affordability, persistency, claims experience and customer understanding.

The final framework should therefore pursue several objectives together. Distribution economics should become more rational. Genuine advice and servicing should remain economically viable. Underserved markets should receive targeted incentives. Product complexity should be reflected in conduct requirements. Mis-selling should carry meaningful consequences. RBI and IRDAI should coordinate where their regulatory responsibilities meet.

IRDAI has identified a structural issue that merits reform. The consultation process should now ensure that the final framework distinguishes between distribution costs that create genuine value and economic rents that do not.

The industry has an important voice in this process. Its concerns should inform the final design, but they should be weighed alongside the experience of policyholders and the evidence on market conduct.

The purpose of insurance is ultimately protection. A distribution framework should therefore reward the behaviour that strengthens that protection over the life of a policy. That is the standard against which the final IRDAI framework should be judged.