India's insurance regulator is preparing one of the most consequential distribution reforms in the sector's history. The Insurance Regulatory and Development Authority of India (IRDAI) plans to propose that commissions be paid throughout the tenure of an insurance policy instead of being disbursed largely upfront, according to Reuters. The move aims to curb mis-selling, reduce high distribution costs, and align India's compensation model with global markets including the US, UK, and Europe.
Why IRDAI Wants to Change
Under the current framework, distributors can earn commissions of up to 40% of premiums on certain life and health insurance products, with a substantial portion paid at the time of sale. IRDAI Chairman Ajay Seth has repeatedly flagged that high front-loaded acquisition costs reduce value for policyholders, particularly in long-term products, where early exits leave customers with minimal surrender value and weak asset accumulation.
The regulator's concern is structural: hefty upfront commissions encourage distributors to prioritise sales volumes over customer suitability, resulting in mis-selling and customers being pushed into purchasing policies frequently. India's annual gross premium collections exceed Rs 11.9 trillion, but insurance penetration stood at just 3.7% of GDP in 2024, well below the global average of 7.2%.
How Staggered Commissions Would Work
Instead of front-loading 60-70% of the commission at the point of sale, the proposed framework would spread payouts across the policy term. An agent selling a 20-year endowment plan, for instance, would receive a smaller commission each year as long as the policy remains active, rather than a large upfront payment. This aligns the distributor's incentive with the customer's interest: the longer the policy persists, the more the agent earns.
IRDAI is also evaluating a remuneration model that links distributor earnings to the effort involved in selling and servicing a policy. Agents providing personalised advice, assisting with documentation, and helping customers through claims could receive higher compensation than distributors offering basic sales.
What It Means for Policyholders
For consumers, the benefits are threefold. First, reduced mis-selling: when an agent's income depends on policy persistence rather than a one-time sale, the incentive to push unsuitable products diminishes. Second, better advice: effort-based compensation rewards agents who spend time understanding customer needs. Third, lower distribution costs: if upfront acquisition expenses fall, insurers could redirect savings into better products or lower premiums.
What It Means for Agents and Insurers
The transition will be disruptive. Distributors who depend on large upfront commissions will see immediate income pressure. Some may slow sales as they adjust. Some insurers could redesign products. A consultation paper is expected by end of July 2026, with a draft framework to follow within four to six weeks. The reform brings India in line with major global markets, but the transition period will require careful management.
The Broader Reform Context
The commission overhaul sits within a broader wave of IRDAI reforms: 100% FDI liberalisation, the Bima Sugam digital marketplace, risk-based capital framework, and mandatory Ind-AS adoption. Together, these reforms represent the most comprehensive restructuring of India's insurance sector since liberalisation in 2000.