IRDAI’s Reform Push That Can Upend Insurance Startups

When someone buys car insurance in India, it’s generally assumed that most of the premium goes towards insurance coverage. However, this is often not the case. 

On a ₹50,000 motor insurance premium for a new car, an insurer may pay ₹20,000 to ₹30,000 to the dealer or intermediary that sold the policy. That amounts to 40% to 60% of the premium paid by the consumer. 

“The true price of the product may be ₹20,000-₹30,000,” an industry source told Inc42. “But the customer ends up paying almost double because of the commission component.”

To address this, the Insurance Regulatory and Development Authority of India (IRDAI) has come out with a consultation paper. The regulator has proposed that insurance intermediaries earning more than ₹10 Cr in commissions annually publicly disclose those earnings on their websites. IRDAI has also proposed that every policy be tagged to the individual responsible for the sale as part of efforts to strengthen consumer protection. 

It is pertinent to mention that life insurers paid out ₹60,800 Cr in commissions in FY25, a jump of 18% YoY, while overall premium growth was a far more modest 6.7%. Meanwhile, commission expenses in the non-life insurance segment hit ₹47,266 Cr, with IRDAI pulling up 23 insurers for overshooting expense limits.

For years, IRDAI has sought to rein in excessive distribution costs. While it fixed commission caps in the range of 15%-35% based on insurance products, the regulator revised the rules with the Expenses of Management (EoM) framework in 2023. The framework places limits on the expenses insurers can incur, including commissions paid to agents and intermediaries.  

The EoM framework caps the expenses for insurers in the range of 30-35% of the gross written premium (GWP). However, it hasn’t proved to be as effective as IRDAI intended. 

“This 30% capping was still leading to higher commissions,” said Animesh Mehta, CEO of Acko General Insurance. “Insurance companies were optimising from one source or another, doing some kind of portfolio balancing but still giving away a higher commission in some or the other way. It didn’t lead to any correction.”

For instance, Turtlemint, one of India’s largest insurance distribution platforms whose IPO closed earlier this week, generated 88% of its revenue from “marketing fees” paid by insurers for lead generation and brand promotion in FY23.

When IRDAI closed that loophole through revised commission regulations in FY23, its revenue collapsed by 81% on a restated basis in FY24. 

The Proposal That Could Reshape Insurance Distribution 

IRDAI’s consultation paper covers every category of insurance intermediary from corporate agents, insurance brokers, web aggregators to insurance marketing firms, and common public service centres (CPSCs).

However, industry players believe that the consultation paper is a small step in IRDAI’s plan to overhaul insurance distribution. 

“Going in, a lot of the industry expected this draft to change how commissions are paid to distributors. It doesn’t. And we’re a bit surprised by it,” says Shrehith Karkera, cofounder of Ditto Insurance. 

According to him, the industry had been bracing for more structural reforms, such as an effort-based commission framework that links distributor remuneration to the work involved in selling and servicing a policy, rather than merely closing a sale. 

While such a framework is yet to materialise, sources said IRDAI is working on a broader framework that could place a hard cap on commissions earned by intermediaries per policy while simultaneously tightening EoM limits. 

“This consultation draft is not even 1% of what may come up,” one industry executive told Inc42. 

The regulator’s objective is to ensure that a larger share of every premium rupee is directed towards customer benefits, including better claims servicing, lower pricing, wider coverage and improved customer experience, rather than distribution costs. 

Sources said that some of the commission caps being discussed internally could be in the single-digit percentage range. If implemented, such a move would dramatically alter the economics of insurance distribution. 

The prospect of such reforms has already sparked concerns across the industry. Recently, PB Fintech chairman Yashish Dahiya told the Economic Times that the proposed commission caps could pose an existential threat to insurance distributors like Policybazaar, and that the company could consider evaluating an insurance manufacturing licence to design, underwrite and sell policies directly. 

Transparency First, Commission Caps Later 

Commission caps may still be in the works. But the disclosure draft already on the table seeks to address a more immediate problem — transparency.  

Today, when a customer visits an insurance aggregator and sees a “recommended” policy at the top of the comparison page, there is little visibility into whether that recommendation reflects the customer’s needs or the commission earned by the platform. 

In theory, the ranking and prominence of a policy can be influenced by the economics behind it. If platforms are required to publicly disclose the commissions they earn from different insurers, customers would gain a clearer understanding of the incentives behind those recommendations.

“If a platform has to disclose that it earns 25% commission on Policy A and 8% on Policy B, customers can begin asking why Policy A is being recommended,” said one industry executive.

However, Ditto Insurance’s Karkera cautioned that the impact will depend on how the final disclosure framework is structured.

“The draft doesn’t actually define how commissions get reported, whether it’s what each insurer pays you, or how it’s broken down. Until that’s settled, it’s premature to say disclosure will move customer behaviour in any direction,” he said. 

The draft also proposes that every policy be tagged to a specific named individual responsible for the sale. Industry participants believe this provision is primarily aimed at the bancassurance channel, where accountability for mis-selling has often been difficult to establish. 

This is particularly relevant because bancassurance has long been regarded as one of the most mis-selling-prone channels. Customers visiting a bank branch to open a fixed deposit or renew a loan are frequently pitched insurance products that generate significantly higher commissions than alternatives.

The customer often relies on the bank’s advice, creating a structural imbalance in the relationship. When the product later proves unsuitable, accountability can become difficult to establish.

Notably, the RBI has been taking a number of steps to tighten regulations in this area. In June 2026, it issued directions prohibiting bundling of insurance with loans, mandating explicit consent for each product, and making regulated entities accountable for mis-selling by their agents. The framework will come into effect on January 1, 2027.

For insurtech startups like Policybazaar, InsuranceDekho (now merged with RenewBuy), Coverfox, and others, whose businesses are built on insurance distribution, the broader implications extend beyond compliance. Mandatory disclosures could fundamentally alter how customers evaluate recommendations and, over time, reshape the economics of distribution itself.

Beyond Commissions: Trust Deficit At The Heart Of Insurance

“Commission-based business models are going to see a reset of revenue majorly,” said Mehta. “Then they have to figure out how to expand beyond their current distribution economics.” 

Karkera, too, said that lower commissions could disrupt the industry but added that distributors will eventually adapt.

“Distributor economics is mostly people-related costs and these costs don’t move overnight, so sharp changes to commissions do affect how the business works. But you adapt, especially when the change is pro-consumer,” he said.

The impact could extend beyond revenue. If commissions fall sharply, the incentive to become an insurance agent may weaken, potentially shrinking the agent workforce.

According to Mehta, a meaningful commission cap could make insurance distribution less attractive as a profession, leading to a market correction as fewer people choose to enter the business.

It is pertinent to mention that India’s insurance penetration remains stubbornly low. Insurance penetration fell to 3.7% of GDP in FY25, marking the third consecutive annual decline from the pandemic-era peak of 4.2%. Insurance density stood at just $97 per capita as against a global average of $943.

For critics of the current model, the problem is not merely low penetration but incentive misalignment. Agents often earn significantly higher commissions on traditional endowment and ULIP products than on pure term insurance, despite the latter typically offering substantially higher protection per rupee of premium. 

Critics argue that distributors, as a result, are incentivised to sell products that maximise earnings rather than those that maximise protection.

However, Karkera said that commissions alone should not be seen as the reason behind the low insurance penetration in the country. 

“Commissions are part of the picture, not the whole of it. Medical inflation, claims costs and how risk gets priced all play a role,” he said. “Blaming high premiums primarily on distribution oversimplifies a genuinely complex problem.”

The broader question, according to one industry analyst, is if the insurance distribution ecosystem is solving the right problem.

In an ideal market, customers buy directly from insurers and trust that claims will be honoured fairly and efficiently. The continued importance of intermediaries suggests that trust in insurers remains incomplete.

“People don’t go to advisors only for product discovery. They go because they want someone in their corner when dealing with the insurer,” the analyst said.

Viewed through this lens, the commission caps do not address the route problem. Reducing distributors’ income does not address why customers rely on intermediaries in the first place.

A more durable solution, the analyst argued, is to tie distributors’ remuneration to customer outcomes such as claims support turnaround, grievance resolution rates, and complaint volumes rather than the transaction itself. This, he added, would align incentives against mis-selling far more effectively than any fee ceiling.

Overall, IRDAI currently has five drafts open for public consultation, with feedback on all of them due during July 8-10. 

Beyond the proposed overhaul of insurance intermediary regulations, the drafts cover a framework for how IRDAI makes regulations, a revised penalty regime, lower capital requirements for foreign reinsurers, and new cybersecurity guidelines.

“There’s going to be a lot of activity around the IRDAI reforms,” said Mehta. “There will be noise around this, and there will be narrative on both sides.”

The final rules, once they are ready, may change the way the insurance industry operates.

Edited by Vinaykumar Rai
Creatives by Abhyam Gusai

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