The proposed reforms form part of a broader review of India's insurance distribution framework. A draft consultation framework is expected to be circulated within the next four to six weeks, according to one of the sources, who requested anonymity because the discussions are confidential.
If implemented, the proposed commission structure would align India's insurance distribution model with established practices followed in major global markets, including the United States, the United Kingdom and several European countries. The proposal to replace large upfront commissions with payments distributed throughout the duration of a policy has not been previously reported.
IRDAI did not immediately respond to a request for comment. However, IRDAI Chairperson Ajay Seth stated last week that the regulator is working on a consultation paper on distribution reforms, which is expected to be released by the end of July.
The proposed changes come as Indian authorities continue efforts to modernize the country's insurance sector. Regulators have expressed concerns that substantial upfront commissions encourage distributors to prioritize sales volumes over customer suitability, resulting in widespread mis-selling and customers being persuaded to purchase policies that may not meet their actual insurance requirements.
According to industry executives, distributors currently earn commissions of up to 40 percent of premiums on certain life and health insurance products, with a significant portion paid immediately after the sale. The regulator believes that distributing commissions over the entire policy term could better align the interests of distributors with long-term customer service and policy retention.
India remains one of Asia's largest insurance markets, with annual gross premium collections exceeding 11.9 trillion rupees, equivalent to approximately 125 billion United States dollars. Despite this growth, insurance penetration stood at only 3.7 percent of the country's Gross Domestic Product in 2024, significantly below the global average of 7.2 percent, according to estimates by Allianz.
The government has already introduced several measures to strengthen the insurance sector. Last year, it reduced the tax on individual health and life insurance premiums from 18 percent to zero percent to improve affordability for consumers. It also increased the foreign direct investment limit in the insurance sector to 100 percent, triggering renewed interest from overseas companies.
In addition to restructuring commission payments, IRDAI is also considering a new pricing model that would determine distributor commissions based on the effort required to sell and service individual insurance policies. Under the existing system, commissions are generally fixed through agreements between insurers and distributors.
The proposed model would provide higher commission payments to agents who offer extensive customer support, including face-to-face advisory services, assistance with documentation and claim management. In contrast, distributors such as banks that primarily sell insurance policies as add-on financial products could receive comparatively lower commissions.
The regulator is also evaluating the possibility of introducing commission caps based on factors such as the type of insurance product, policy duration and overall complexity. The proposed reforms represent one of the most significant changes to India's insurance distribution system in recent years and are expected to reshape industry practices by promoting customer-centric selling while improving transparency, sustainability and long-term market growth.
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