The single number insurers are contesting in IRDAI's distribution consultation is not a commission rate. It is the expense ceiling itself, and as of October 1 the industry's answer to it is taking shape: a tiered structure modelled on the mutual fund industry, in which an insurer is allowed a higher expense ratio on its first tranche of premium and progressively less as premium crosses specified thresholds. The Economic Times reported on October 1 that insurers are discussing seeking this from the regulator, with total premium used as the proxy for scale in place of assets under management, and that the thresholds and percentages are still under discussion. Bharti Life chief executive Parag Raja made the same argument publicly the same day, proposing a graded structure based on an insurer's size, scale and business model, on the reasoning that smaller and mid-sized insurers need additional flexibility to absorb fixed costs while they scale. The regulatory proposal insurers are answering is specific: life insurers must bring expenses of management to 15 percent of gross direct premium within two years and 12.5 percent within five, with insurers already below the benchmark required to reach 10 percent; general insurers must bring theirs to 25 percent within two years and 20 percent within five, with annual reductions beginning in FY2027-28. Feedback closes on October 25.
Context: what the mutual fund analogy is actually borrowing
The regulatory question is whether expense limits should be a function of an insurer's size, and the mutual fund industry is the closest Indian comparator because it already made that choice. Under the mutual fund expense framework, the permitted expense ratio falls as a scheme's assets grow, which is what allows a small asset manager to operate without being permanently out-competed by a large one. Insurers raising this are asking for the same shape with one substitution: assets under management becomes premium. The economic logic is the same, because in both cases fixed costs do not scale with the volume being measured. An insurer with Rs 1,000 crore of premium and one with Rs 50,000 crore of premium do not run their technology platforms, compliance functions or underwriting infrastructure at the same cost as a proportion of premium.
Two details of the reported proposal are worth holding onto, because they are what an evaluator will test. First, the ladder is progressive rather than stepwise, which means the question of where the thresholds sit is the whole negotiation. Second, the industry is framing this as a competition measure, not only a cost measure: one executive quoted by The Economic Times said it could prevent the market from becoming concentrated among a few large insurers. That framing is the one IRDAI's own analysis supports, because the paper's data shows the opposite tendency.
Implication: what conceding the ceiling while arguing about its shape does and does not settle
- The concession is real and it is the important one. Nothing in the reporting suggests insurers are asking for the paper to be withdrawn or the glide path to be abandoned. They are asking for a different curve, not a different destination. That matters for how a reader should weight the outcome: a final framework with a ladder still caps total expense, and a cap with a slope still bites hardest on the companies with the least scale.
- The arithmetic objection survives intact, and the ladder does not answer it. The broker association's September 29 submission, covered in our reporting on the consultation responses, argued that a large part of the apparent rise in distribution cost is reclassified marketing spend plus the loss of input tax credit after individual life and health premiums became GST-exempt in September 2025. A ladder changes which company bears how much of a cap. It does not separate genuine distributor remuneration from reclassified spend. If that separation is the problem, a tiered ceiling reduces the number of companies that must do the separating.
- The concentration risk and the coverage risk pull in opposite directions, and neither side has priced the trade. A ladder protects sub-scale insurers from having to match a large insurer's efficiency before they have scale, which should preserve entrants. It also lowers the cost of running at a distance from the efficiency frontier, which is what makes low-value and low-effort books survivable. The rural and social sector coverage the paper lists as an objective depends on someone still being willing to write a small policy in a small town for a small margin, and the consultation has no mechanism that pays for it other than the additional rewards for underserved areas, which is exactly the part IBAI says will not cover servicing costs.
- The sub-scale insurers are the group with the least room to argue. Published analysis of the consultation data shows a wide dispersion of current expense ratios, with a small number of insurers running far above the proposed ceiling and non-commission operating costs alone ranging across a band wide enough that the highest-cost insurers cannot reach compliance through commission cuts. For those companies, a ladder is a reprieve sized by premium thresholds that have not been set, negotiated by trade associations that represent the large insurers as well. The group that most needs the ladder is the group least able to specify it.
- For a policyholder, the ladder is close to invisible and the destination is not. No premium you are quoted this year changes. What the ladder determines is how many insurers remain willing to sell the unglamorous products at a thin margin, and whether the market that opened to 100 percent foreign investment in December 2025 has enough firms in it to be competitive by the time the glide path reaches its five-year mark. A framework that keeps ten insurers competing at fifteen percent expense is a different market from one that keeps four competing at twelve and a half.
Action
Nothing in the reporting identifies the thresholds, so there is no calculation to do yet. What is worth doing now is the same preparation that applies to any version of the framework: a written cost model per product line rather than one blended number, because a ladder is assessed against premium volumes and a blended view hides where the volumes sit. If you buy through a bank or a lender's tie-up, the useful question is unchanged and does not depend on the ladder: ask who is paid for the policy, in rupees, and whether the cover continues if you change lender. If you advise or sell, the thing to watch for in the final text is whether the ladder is defined on premium alone or on premium with an explicit carve-out for new business, because the second version is materially friendlier to a small book. Watch three things when the draft regulations appear: whether IRDAI publishes the regulatory impact assessment IBAI has asked for, whether the ladder survives at all, and whether the underserved-market rewards are quantified or left as a principle.
Watch item: the full submission due by October 25, and whether the ladder is argued in the same document as a request for a longer glide path. If they travel together, the industry is asking for time as much as for shape, and the two should be judged separately.