Breakdown: IRDAI Consultation Paper..

On 23 September 2026, India’s insurance regulator proposed to cap how much sellers can earn from every policy.

This is part of the ‘Breakdown’ series, where I try to explain complex issues & simplify them for everyone to understand. If you like blogs like this, do like, subscribe & leave a comment.

Yesterday, the Insurance Regulatory and Development Authority of India, or IRDAI, released a public consultation paper called “Recalibrating Economics of Insurance Distribution” (TaxGuru). As a result, some shares fell by more than 30%.

That made me curious. A paper about “distribution economics” does not sound exciting, yet it moved the market more than most budgets do. So I read through the reporting, pulled out the numbers, and tried to explain it for you..

First, what is insurance?

Imagine 100 students in a school. Each one puts ₹100 into a common box every year. If any student breaks their spectacles or watch, the box pays for new ones. Most students will never need the money, but everyone feels safe because the box is there.

That box is insurance. The ₹100 each student puts in is the premium. The money paid out for broken spectacles/watch is a claim. The company that looks after the box is the insurer.

So who is the seller (Agent)?

Most people do not walk into an insurance company’s office. Someone sells the policy to them. That someone could be an LIC agent in your colony, the bank where your parents have an account, the finance company that gave your family a car loan, or an app on your phone.

For each policy sold, the insurer pays the seller a fee. This fee is called commission.

Commission is not wrong. Agents do real work: they explain the policy, fill the forms, and help when a claim comes. The question IRDAI is asking is simpler. How big should that payout be? Because every rupee paid as commission is a rupee that did not go into the box for you.

The problem IRDAI is trying to fix

Here is the part that surprised me. When insurance is sold along with a loan, the lender’s (Banks & NBFCs) cut has become very large. Points from the consulting paper shows that on health insurance sold with loans, has payouts to lenders around 40% of the premium. For credit life insurance, the policy that pays off a loan if the borrower dies, it is around 28% (Business Today).

Think about that in school terms. If a student pays ₹100 into the box, ₹40 goes to the person who collected it, and only ₹60 is left for spectacles.

Commissions have also been growing faster than the business itself. Between FY23 and FY25, motor insurance premiums grew 34%, but commissions on motor grew 259%. In retail health insurance, premiums grew 53% and commissions grew 118% (Whalesbook).

When the seller’s cut grows faster than the box, somebody pays for it. Usually it is the policyholder, through higher premiums or lower returns.

Change 1: A smaller slice for costs

Every insurer is allowed to spend only a part of the premium on commissions plus running the company, such as salaries, offices and advertising. This is called the Expense of Management limit.

The paper proposes to shrink it over five years (Business Standard; The Tribune):

• General insurers (motor, health, home): from 30% of premium today to 25% in two years and 20% in five years.
• Life insurers: one company-wide limit of 15% within two years and 12.5% within five years.

One honest caveat. For general insurers, the premium used for the calculation also changes, from “gross written premium” to “gross direct premium income”. So 30% and 20% are not measured on exactly the same base (This reduces the base on which the commission is calculated). The direction is still clear: a smaller slice for costs.

IRDAI’s own reason is worth quoting. The aim is 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 Tribune).

Change 2: A cap on the seller’s cut, product by product

Since April 2023, each insurer’s board has decided how much commission to pay, as long as the total stayed within the overall cost limit (JSA). That gave insurers freedom, and as the numbers above show, commissions grew much faster than premiums after that.

The paper proposes going back to clear caps, set by product, by channel and by how much effort the sale needs. Two things stood out for me:

• Individual agents get slightly more than companies. An agent who sells a long-term life savings plan can earn up to 25% in the first year. A bank or a broker selling the same plan can earn up to 20%.
• Simple products get less. Single-premium savings plans, where you pay once, carry a cap of only about 1% to 2%. Motor third-party insurance, which the law requires every vehicle owner to buy anyway, gets 0% for distribution companies.

Sources for the caps: Business Standard, Entrackr, NiftyTrader.

There is also a small reward built in for villages and smaller towns. Sales in areas with populations under 50,000, and in cities under 10 lakh, can earn extra above the standard cap (TaxGuru). The idea is to keep sellers interested in places where fewer people have insurance.

Change 3: No more forced insurance with your loan

Many families have had this experience. You go to take a car loan or a home loan, and the policy is already added to the papers. It feels like you cannot say no.

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The paper proposes three things here (Free Press Journal; Business Standard):

• Insurance cannot be made compulsory to get a home, auto, personal or microfinance loan.
• The lender (Bank) must show you the cost of the loan with insurance and without insurance, side by side.
• Bank and NBFC staff cannot be given target-based rewards for selling insurance, such as cash bonuses, foreign trips or sales contests. Employees currently have targets that are being rewarded in different ways.

And the lender’s (Bank) cut on loan-linked policies drops sharply.

Change 4: If you are mis-sold, someone is accountable

Mis-selling means being sold a policy you did not need or did not understand. The paper proposes that the seller must record your needs and why the product suits you, that the individual seller’s identity is linked to every policy, and that commission can be taken back (a “claw-back”) if a policy turns out to be mis-sold. Cases of mis-selling would also be disclosed publicly (The Tribune).

In school terms, if the collector tells a student to put money into the wrong box, the collector has to return the fee.

Change 5: Fewer labels, same rules for the same job

Today there are many separate licence types for selling insurance: agents, corporate agents, brokers, web aggregators and more. The paper proposes three buckets instead: Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions. IRDAI describes the principle as “same structure, same functions, same norms” (The Tribune).

It also wants to use Bima Sugam, the planned online insurance marketplace, and a Public Insurance Registry so that policies are easier to find, compare and move (TaxGuru).

Before and after, side by side

You, the policyholder. If the proposals go through as written, less of your premium goes on selling and running costs. For general insurance, that can mean more money available for claims or lower prices. For life savings plans, IRDAI expects better returns. You also get the right to say no to insurance with your loan, and a clearer trail if something is mis-sold.

Individual agents. Their commissions are capped too, but at a higher level than companies. The rural reward helps agents in smaller towns. For many agents, this looks less painful than it does for large distributors.

Banks and NBFCs. This is where the money was. Citi estimates that insurance commissions are 5% to 25% of core fee income for banks, and that distribution economics could compress by 70% to 90% in several high-margin categories if the paper is implemented in its current form (Business Today). IIFL Securities estimates a 1% to 12% hit to NBFC profit before tax, with L&T Finance most exposed (Business Today).

Online platforms. Health renewals, term plans and motor insurance are large parts of their business, and all three face lower caps. Emkay Global wrote that PB Fintech’s “business model will come under question” (Business Today).

Insurance companies. They pay less to sell, which helps. But channels that relied on high payouts may push their products less. They also have five years to bring total costs down.

Investors. The market reacted within hours.

The pattern made sense to me once I saw it. Companies that earn from selling insurance fell the most. Some general insurers, such as ICICI Lombard and Go Digit, rose (Business Standard). My reading is that investors expect lower selling costs to help some insurers, but that is an interpretation, not something the companies have said. Jefferies kept its Buy ratings on ten bank stocks, including the ones that fell (Business Today). So not everyone thinks the damage is permanent.

What happens next

This is a consultation paper, not a final rule. Anyone can send comments to IRDAI until 25 October 2026 (TaxGuru). The numbers could change after that. Reports suggest the tighter commission caps would apply from FY28, and the cost ceilings step down over five years (Business Today).

What I take away from this

I used to think of the premium as the price of insurance. After reading this, I see it as the price of insurance plus the price of being sold insurance. For some products, the second part has been surprisingly large.

IRDAI is not saying sellers should not be paid. It is saying the cut should match the work, and that the person paying the premium should know who is getting paid and how much.

Whether that works will depend on the final rules, and on whether sellers keep reaching people once the big commissions are gone. But the next time a bank adds a policy to my loan papers, I will ask a simple question: what does this loan cost without it?

This is part of Breakdown, a series where I take one business idea or complex issue and pull it apart until the numbers make sense. The paper is a draft, and all proposed figures may change after the consultation closes. Market moves are intraday figures as reported on 24 September 2026.
I am not a financial advisor, and nothing here is a recommendation to buy or sell any share.
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Sources

• TaxGuru: IRDAI proposes distribution reforms to cut insurance costs and strengthen policyholder protection
• The Tribune: IRDAI proposes overhaul of insurance distribution, tighter cost limits and safeguards against mis-selling
• ANI: IRDAI proposes overhaul of insurance distribution
• Business Standard: IRDAI proposes tighter expense limits, new commission caps for insurers
• Business Standard: Insurance stocks tumble as IRDAI proposes overhaul of distribution economics
• Business Today: PB Fintech shares fall 20%; Bajaj Finance, L&T Finance also take hit
• Business Today: YES Bank, IndusInd, IDFC First shares: what Citi and Jefferies say
• Free Press Journal: Bank, NBFC stocks fall as IRDAI proposes curbs on loan-linked insurance sales
• Entrackr: PB Fintech shares fall over 30% after IRDAI proposes lower insurance commissions
• NiftyTrader: PB Fintech share price falls, IRDAI commission reset
• Whalesbook: IRDAI proposes strict caps on insurance commissions and sales reforms

JSA: New regulations on payment of commission and expenses of management (2023)