IRDAI’s consultation paper “Recalibrating Economics of Insurance Distribution” goes beyond commission rationalisation to propose a sweeping overhaul of India’s insurance distribution ecosystem, covering intermediary structures, remuneration, accountability, expense limits and digital infrastructure.Is it on the right track?
Ashish Teni,Senior Specialist Insurance and Reinsurance,Trilegal
Shruti Rajan,Financial Regulatory Partner,Trilegal
Regulator IRDAI’s consultation paper titled “Recalibrating Economics of Insurance Distribution” extends well beyond a re-examination of commissions. It seeks to reconfigure insurance distribution by determining who may sell, how distribution is compensated, where accountability rests, and how the market’s digital infrastructure evolves.
Taken together, the proposals represent an ambitious attempt to rethink the structure and remuneration of insurance distribution in India. More fundamentally, they raise a question that extends beyond insurance: what ought the economic and regulatory architecture of a distribution business recognise as the value of distribution?
The proposals appear to be founded upon two principles: greater transparency around distribution costs and more precise individual accountability.
The changes include a restructuring of intermediary architecture through Insurance Distribution Entities (“IDEs”), Insurance Distribution Persons (“IDPs”) and Market Infrastructure Institutions (“MIIs”); granular commission ceilings; a broadened definition of “commission”; direct flow of premium and claims amounts; tighter Expenses of Management (“EoM”) limits; identification of the individual seller; the proposed elimination of the Motor Insurance Service Provider (“MISP”) framework; and further development of Bima Sugam.
Who can distribute
The consultation paper proposes a simpler distribution architecture through IDEs, IDPs and MIIs. This contrasts with the existing framework, which distinguishes brokers, corporate agents and other intermediaries according to their relationships with insurers and customers.
Any re-jigging of categories must therefore be accompanied by clarity on the obligations attached to the function actually performed. This is especially important where a distributor exercises judgement rather than merely facilitating a transaction. Collapsing categories without matching advisory and suitability duties may create uncertainty at the point where customers most rely on professional judgement.
This is particularly relevant in life and health insurance, where the boundary between distribution and advice can influence product selection and customer experience. In an open-architecture network, the regulatory framework must clearly identify where the customer-advisory onus rests.
A simpler licensing architecture should not become a less precise accountability architecture.
What is encompassed within “commission”
The proposed redefinition of commission may be one of the Consultation Paper’s most consequential changes. The approach extends beyond amounts formally labelled commission to economic benefits reaching distributors, including incentives, rewards, marketing support, technology-related payments, related-party arrangements, panel-listing fees and other consideration.
Semantics should not determine whether economic value transferred to a distributor falls within the regulatory framework.
But this raises a harder question: at what point does remuneration cease and legitimate cost reimbursement commence?
Payments for API integration, claims-servicing technology and shared premises that reflect actual costs and carry no margin may, depending on their nature and pricing, represent operating expenditure rather than remuneration. Treating every payment as remuneration risks bringing legitimate operating arrangements within ceilings designed to regulate economic incentives.
Arm’s-length benchmarking, independent cost certification or a defined safe harbour could help separate genuine operating expenditure from arrangements that are, in substance, remuneration, while providing greater regulatory predictability.
The mechanics of distribution
The arithmetic of the reform is most evident in the interaction between commission and expenses of management (EoM). The Consultation Paper effectively treats the two as parts of one system.
Per-policy commission ceilings return, differentiated by product category, distributor type, new versus renewal business and sourcing location — a more granular approach following the flexibility introduced under the 2023 framework.
For insurers, the EoM glide path is sharpened. EoM caps total management expenses, of which commission is one component alongside technology, insurance awareness, rural and government-scheme expenditure; it is not, by itself, a cap on commission payouts.
Life insurers move to an EoM ceiling of 15% of total premium within two years and 12.5% within five years, with a 10% threshold for those already below 15% in FY 2024-25.
General insurers move from gross written premium to gross direct premium income as the base, with ceilings of 25% and 20% within two and five years respectively. Separate allowances are absorbed into the overall cap, while the regulatory fee reduces from 0.05% to 0.04% of premium, capped at Rs 20 crore.
Intermediaries including corporate agents do not carry EoM directly, but tighter insurer-side economics will affect negotiations over commission, marketing support and technology reimbursements.
For banks and NBFCs, the broadened “commission” perimeter intersects with RBI restrictions on bundling and employee incentives. Loan origination journeys, consent flows and product design in embedded-insurance use cases will therefore need to satisfy both regulatory frameworks.
The economics of insurance distribution in a lending journey cannot be considered in isolation from the economics and conduct architecture of the underlying credit transaction.
The digital paradox
Regulatory direction favours deeper digital integration: MII integration, Public Insurance Registry feeds, pull-based distribution, dark-pattern compliance and technology-driven conduct monitoring. Each requires investment in technology and infrastructure.
At the same time, the Consultation Paper modifies the treatment of technology expenditure within EoM: previously ring-fenced allowances for technology, insurance awareness, rural business and government schemes are absorbed into a single overall cap.
This creates an operational paradox. Insurers and intermediaries may be required to develop and sustain the digital infrastructure on which the new regulatory framework depends, while having diminished latitude to bear the related expenses. The distinction matters as technology ceases to be merely a commercial differentiator and becomes part of the regulatory architecture itself.
The final framework should therefore distinguish between technology expenditure that constitutes distributional remuneration and expenditure necessary to comply with, or participate in, the regulated digital ecosystem.
Accountability requires due process
The Consultation Paper’s insistence on pinpointing the individual accountable for a sale, coupled with claw-back and public disclosure where misselling occurs, reflects a wider shift towards individual accountability across financial services.
Such measures may have significant financial, professional and reputational consequences even when not formally designated as penalties. The final framework should therefore articulate the procedural protections applicable to such determinations. Notice, evidence, attribution of responsibility, opportunity to respond, review and appeal should not be left implicit.
Natural justice is not a counterweight to effective enforcement; it is part of the architecture that makes enforcement credible.
The hardest part is the transition
The weightiest legal question may concern not IRDAI’s authority to alter the regulatory framework, but how that alteration applies to arrangements established under the prior one.
At least three categories merit separate consideration.
First, new arrangements can reasonably be expected to comply from the effective date.
Second, existing arrangements may require a defined migration period to bring contractual and operational structures into compliance without needless disruption.
Third, arrangements subject to specific scrutiny or authorisation under the prevailing regime may justify a longer transition where regulated entities structured operations in reliance on that regulatory position.
The doctrine of legitimate expectation may, in appropriate cases, operate as an additional constraint on abrupt or retrospective withdrawal, particularly where regulatory approval has induced irreversible commercial and contractual commitments.
The final regulations should therefore clarify effective dates, transition periods, treatment of pre-existing contracts and the circumstances in which grandfathering will apply.
The question beneath the question
The insurance industry is not alone in confronting this issue. The mutual fund industry has grappled with comparable questions over the allocation of economics between manufacturers, distributors and customers as regulation has shifted between different distribution models.
Where distribution is chiefly origination, the growth of direct and digital channels will inevitably pressure the economics of the conventional intermediary. But where distribution extends to advice, product selection, customer education, servicing, claims assistance and helping customers navigate a complex insurance market, the framework must recognise those functions and provide an economic structure that enables their sustainable delivery.
The challenge for regulation is therefore to distinguish between remuneration that rewards the mere acquisition of premium and remuneration that supports genuine customer value.
The cost of distribution is only one side of the equation.
A low-cost model is not necessarily an efficient one if it reduces advice, accessibility, servicing or customer understanding. Conversely, a more expensive model may be economically rational where it performs functions that materially improve customer outcomes.
The more enduring question is therefore not simply how much distribution should cost, but what economic value distribution creates and how that value should be recognised, disclosed and remunerated.
“The views expressed in this article are those of the authors and do not necessarily reflect the views of the publication.