The Reserve Bank of India's latest Financial Stability Report has highlighted a concerning trend in insurance commission practices, with private insurers' commission ratio surging almost two times in 2025-26 from 2021-22, while maintaining stable operating expense ratios. According to the RBI's Financial Stability Report, this escalation in distribution costs significantly outpaces private sector premium growth, compressing net margins and raising the risk of acquisition-cost-driven mis-selling. The central bank noted a distinct divergence in cost structure between public and private insurers, with private insurers being 'aggressive' in offering commission hikes while public insurers showed restraint. This commission surge has direct implications for asset-liability management, as early exits disrupt long-duration investment strategies and force asset liquidation ahead of schedule.
India's insurance regulator is set to overhaul distributor commissions, proposing payments spread over a policy's life to curb mis-selling and reduce high distribution costs. According to reports from Reuters and Business Standard, this move aligns India with global practices and aims to ensure customer suitability over sales volume. A draft framework is imminent and could be circulated within the next four to six weeks, potentially impacting how agents are compensated for their services. The revamp is part of a broad review by the Insurance Regulatory and Development Authority of India (IRDAI) and aims to reduce high distribution costs in one of the world's fastest-growing insurance markets. The planned proposal to move from large upfront payments in favour of paying out commissions over the life of a policy has not been previously reported.
The reform addresses significant concerns about commission practices in India's insurance sector. As reported by Reuters and Business Standard, distributors can earn commissions of up to 40% of premiums on some life and health insurance products, with a significant portion of that gained upfront. This structure has been criticized for encouraging distributors to prioritize sales volumes over customer suitability, resulting in mis-selling and customers being pushed into purchasing policies frequently. Industry executives confirm these hefty upfront commissions have been a major concern for regulators. The current system largely relies on a fixed commission agreed between an insurer and a distributor, but the model under consideration could reward agents helping customers with face-to-face advisory services, filling out paperwork and managing claims with a higher commission fee than banks selling policies as add-on products.
Recognizing the commission concerns, IRDAI has taken proactive steps to align executive compensation with customer outcomes. According to The Hindu BusinessLine, the regulator recently amended the Corporate Governance for Insurers Regulations, linking variable pay and incentives of CEOs, MDs, and Key Management Personnel directly to policyholder outcomes and customer satisfaction rather than just sales and profit margins. This move represents a fundamental shift in how insurers are incentivized, ensuring that executive compensation is tied to actual customer satisfaction and policyholder outcomes rather than purely sales metrics. The regulator is also considering linking commissions to a pricing model that factors in the effort involved in selling and servicing a policy.
India represents one of Asia's largest insurance markets with gross premium collections exceeding ₹11.9 trillion ($125 billion) annually. However, insurance penetration was just 3.7% of GDP in 2024, significantly below the global average of 7.2% estimated by Allianz. The government has taken steps to boost the sector, including cutting tax on individual health and life insurance premiums to 0% from 18% and opening it to 100% foreign direct investment. This policy change has led to further interest from overseas companies in the Indian insurance market.
