IRDAI proposes major overhaul of insurance distribution framework

IRDAI proposes a major overhaul of the insurance distribution framework with a simpler three-tier structure, lower expense limits, and new commission rules. The reforms aim to cut costs, curb mis-selling, and improve transparency for policyholders.

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a major overhaul of the insurance distribution framework, including a simpler three-tier architecture, lower expense limits, revamped commission structures and stronger safeguards against mis-selling, as it seeks to reduce distribution costs and improve transparency for policyholders. The insurance regulator released a public consultation paper on “Recalibrating Economics of Insurance Distribution”, outlining reforms covering distribution structure, expenses, commissions, market conduct, transparency and the use of digital infrastructure.

New Three-Tier Distribution Architecture

The proposals are aimed at creating a more customer-centric, competitive and cost-efficient insurance distribution ecosystem. Under the proposed framework, IRDAI plans to replace the existing fragmented distribution architecture with three broad categories — Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs).

“The proposed distribution architecture is guided by the principle of ‘same structure, same functions, same norms,’” IRDAI said. The regulator has also proposed simpler registration, significantly lower entry and capital requirements and reduced regulatory fees. Distributors would get greater flexibility to undertake insurance as well as other financial and non-financial activities, potentially opening up additional business and income opportunities, including in smaller markets.

Reduced Expense of Management Limits

A key part of the proposed reforms is a reduction in insurers' Expense of Management (EoM) limits. For life insurers, the EoM limit would shift to a company-level basis linked to Gross Direct Premium Income (GDPI), with the ceiling proposed at 15 per cent within two years and 12.5 per cent within five years.

For general insurers, the calculation would shift from Gross Written Premium (GWP) to domestic GDPI, while the EoM limit would progressively decline from 30 per cent of GWP to 20 per cent of GDPI within five years. “The proposed reduction in EoM is intended to lower the overall cost of insurance, thereby expanding the risk pool available in general insurance and enhancing returns to policyholders in life savings products,” the regulator said.

New Commission and Reward Structure

IRDAI has also proposed recalibrating commissions based on the segment, line of business, distribution channel, product complexity and the effort required to sell and service a product, instead of following a uniform approach. Distributors selling products in underserved areas, including rural areas and smaller towns and cities, could receive rewards over and above normal commission limits.

Curbing Mis-Selling and Boosting Transparency

The consultation paper also proposes tighter measures to curb mis-selling and compulsory bundling of insurance with other financial products. These include documenting customer needs and suitability, bringing direct and indirect remuneration within the regulatory definition of commission, and prohibiting volume-linked or reward-linked incentives for bank and NBFC staff selling insurance.

IRDAI has further proposed linking the identity of the individual seller with each policy, putting information on mis-selling incidents in the public domain and allowing commission claw-backs in cases of mis-selling. “Greater transparency and stronger accountability are proposed to strengthen the ability of policyholders to make informed choices,” IRDAI said.

Push for Digital Distribution

On digital distribution, the regulator has proposed MIIs as digital, pull-based alternatives for insurance distribution, identifying Bima Sugam as one such infrastructure. It also envisages greater use of the Public Insurance Registry (PIR) to support comparison, portability, transparency and operational efficiency.

IRDAI has invited comments from the public and stakeholders on the proposed reforms, by October 25, 2026. (ANI)

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