India’s insurance sector is poised for a major overhaul, with regulator Insurance Regulatory and Development Authority of India (IRDAI) proposing sweeping reforms to expand insurance penetration, lower costs, improve transparency and foster competition. While the proposals promise a more accessible and efficient insurance ecosystem, the proposed curbs on commissions and operating expenses have sparked concerns among industry intermediaries. The key challenge will be to balance affordability and policyholder protection with the need to incentivise distribution and drive growth.
India is at the cusp of a major insurance sector overhaul with the wide-ranging reform proposals laid out by the watchdog – Insurance Regulatory and Development Authority of India (IRDAI) – which include expanding insurance penetration in the country, driving affordability by capping commissions, increasing transparency and promoting competition.
The IRDAI’s consultation paper issued in September seeks to comprehensively turnaround the sector in line with global best practices and is timely. With growing financialisation and awareness among people on the need for insurance – life and general, the intervention to increase its reach is a welcome step.
India is a 1.4 billion-strong nation with an insurance penetration of just about 4 per cent; therefore, it needs a massive push from the insurance providers, regulator and the government.
The IRDAI aims to fulfil its objective of ‘Insurance for all by 2047′ and if implemented properly, the proposals together could give a much-needed impetus to the sector by creating an ecosystem that aids penetration at each level of the value chain. The consultation paper seeks to do it by hitting two birds with a single stone – one, through promoting growth and ease of doing business and the other by bringing cost of insurance down while ensuring policyholders’ protection.
What consultation paper proposes?
Among major overhauling initiatives, IRDAI has proposed to undo with current fragmented distribution architecture by introducing three broad categories viz Market Infrastructure Institutions (MIIs), Insurance Distribution Entities (IDEs) and Insurance Distribution Persons (IDPs). The framework imbibes the tenet of ‘same structure, same functions, same norms’ to ensure a common regulatory rule for entities with identical structure.
Through this, we could see simplification of India’s insurance distribution framework along with reduction in regulatory inconsistencies while creating a more level playing field for intermediaries performing similar functions. Currently, insurance distribution involves different types of entities — such as brokers, corporate agents, insurance marketing firms and individual agents — operating under different regulatory structures, even when their activities may overlap.
In order to promote ease of doing business, the consultation paper proposes lower capital requirements, easier registration norms with lower entry barriers while recommending lower regulatory fees for distribution entities.
Moreover, distributors could have additional business and income opportunities if IRDAI permits insurance as well as other financial and non-financial activities.
The proposed IRDAI framework further aims to clearly separate open and closed insurance distribution models. In the open architecture, an insurance intermediary, such as a broker or corporate agent, can offer policies from multiple insurers, giving customers greater choice while in a closed architecture, the distributor is tied to a single insurer or a limited set of insurers, restricting the range of products offered.
Clearer rules can help insurers compete on premiums, products and services, potentially benefiting customers meanwhile preventing distributors from exploiting differences in regulations applicable to different business models to gain an unfair advantage.
The regulator is of the view that the policyholders’ returns in life insurance savings schemes could go up with this move.
For the public, the regulator has proposed measures to increase affordability and bring the cost of policies down. One of the things it plans to do is to link Expense of Management (EoM) limit for life insurers to Gross Direct Premium Income (GDPI) from Gross Written Premium (GWP). Through this step IRDAI seeks to reduce EoM to 15 per cent within two years while pushing it further down to 12.5 per cent within five years.
The step will do away with a uniform commission structure and commissions may be determined based on product complexity, distribution channel, line of business, business segment and also the effort involved in selling and servicing the product.
The customers will have greater clarity over the distribution costs which is an essential element of the premium pricing.
The reform further seeks to make provisions for rewarding the agents if they sell insurance products in under-served rural and smaller urban markets.
The reforms also aim to address mis-selling by agents and company executives via public reporting of such cases, documenting customer needs and suitability and linking commissions to the individual policies. In case of mis-selling the insurers would have the freedom to take back the commission earned from policies.
Bone of contention
The proposal to cap commissions and cut expense limit of insurers has not gone down well with broker/agent unions like Insurance Brokers Association of India (IBAI) and Life Insurance Agents’ Federation of India (LIFAI), according to media reports.
They argue that the step will make it economically unsustainable for the existing agents while acting as entry-barrier for new agents. Even as the regulator has extended deadline to submit stakeholders’ feedback to October 31 from October 25, earlier, the industry associations are meeting IRDAI officials to iron out differences.
Mis-selling has been a longstanding evil in the industry and the regulator needs to deal with it with an iron hand. While the agents’ interests need consideration, the policyholders’ interests remain paramount.
The regulator must also ensure that the policyholders get maximum coverage after taking policies and are not made to suffer at the hands of insurance companies when they apply for claims.
Moreover, there should be awareness campaigns to educate policyholders how to decode the policy statements, make right queries and know about their entitlements and rights.
The government has raised foreign direct investment (FDI) limit to 100 per cent under the Sabka Bima, Sabki Raksha (Amendment of Insurance Laws) Act, 2025. This could bring more investments as well as standalone foreign players in the industry, giving more choices to the people.
India currently ranks as the 10th largest insurance market globally by premium volume which shows the rapid growth of this sector. With the above reforms, the potential to penetrate deeper into the country will grow manifold.
According to a data from the Economic Survey 2025-26, the share of insurance and pension funds in household financial assets rose to 29.6 per cent in FY25 from 28.6 per cent in FY19. The total premium income in FY2024-25 jumped over 43 per cent to Rs 11.90 lakh crore compared to Rs 8.30 lakh crore. In this, life insurance premium, which accounts for a lion’s share, has grown by 40 per cent to Rs 8.86 lakh crore (Rs 6.30 lakh crore in FY21) while non-life insurance by 53 per cent to Rs 3.10 lakh crore compared to Rs 2 lakh crore in FY21.
The life insurance segment remains the mainstay of the sector, accounting for 91 per cent of total assets under management (AUM)—the market value of assets managed by financial institutions on behalf of their clients—and around 74 per cent of total premium income. Within the non-life segment, health insurance has emerged as the largest business line, contributing 41 per cent of gross domestic premium and overtaking motor insurance.
So, for companies, the pie is huge and offers immense growth opportunities. The volume can take care of the economics and this is why the need to incentivise potential customers needs a greater push.