IRDAI's new life insurance commission plan: New caps, renewal payouts and rural incentives explained

In a bid to curb high distribution costs and align intermediary incentives with policyholder value, the Insurance Regulatory and Development Authority of India (IRDAI) has proposed bringing back hard, product-level caps on life insurance commissions after removing such limits in 2023.

Under the proposed framework, commissions would vary according to the type of life insurance product, premium-payment term and distribution channel.

The regulator has also proposed higher remuneration for products requiring greater selling effort, and providing stronger incentives for policy renewals and long-term policy persistency.

Why IRDAI wants to change the system

IRDAI said commission caps were removed in 2023 as the regulatory framework moved towards an entity-level Expenses of Management (EoM) approach, under which insurers were given greater flexibility to decide how much they paid distributors.

The flexibility, according to the regulator, has resulted in a sharp increase in commissions.

The 2023 and 2024 framework relies heavily on board-approved commission policies, but IRDAI says board approval has often been more of a formality than substantive cost discipline.

"The inability to exercise adequate cost discipline under the flexible EoM regime makes a compelling case for hard caps on commissions within revised EoM limits, stringent implementation, and enhanced regulatory oversight," the regulator said.

IRDAI's analysis shows that distributor remuneration in the life corporate agency channel grew much faster than premium.

In a representative sample covering around 92% of premium procured through corporate agents, new business premium increased 28% between FY23 and FY25, while total distributor remuneration rose 125%.

Distributor remuneration accounted for nearly 27% of first-year premium, with rewards and incentives adding another 30-60% over base commission.

"Higher remuneration for particular products can create incentives to favour those products irrespective of whether they offer the best fit for the customer," the paper said. " Since consumers may have limited ability to independently evaluate complex insurance products, such incentive structures increase the risk of unsuitable sales, subsequent policy lapses or surrenders, and erosion of trust in the insurance system."

IRDAI's proposed system would put a hard ceiling on the amount that can be paid for a particular life insurance product, while retaining an overall expense discipline at the insurer level.

According to IRDAI, commissions on first-year premiums in individual life insurance have reached nearly 80% in some cases, while the average, excluding direct and online channels, was as high as 50%.

It also said that commissions on first-year premiums paid to intermediaries increased roughly two to three times between FY23 and FY25.

The consultation paper says the current structure rewards new business acquisition than persistency, quality of advice, servicing and claims experience.

"This encourages a short-term focus on premium growth rather than sustainable customer relationships,” it added.

The consultation paper proposes separate ceilings for distribution entities and agents, while also seeking to treat incentives, awards, reimbursements, brand-value payments and non-cash benefits as commission so that payouts cannot simply be shifted into another category.

What are the proposed caps for individual life insurance?

IRDAI has proposed a graded structure based on the premium-payment term for individual non-linked and linked life insurance products.

To be sure, these are proposed maximums, not mandated commission rates.

The regulator is effectively linking the maximum first-year payout to the duration for which the customer commits to pay premiums.

For example, on a 10-year-or-longer individual policy, the proposed maximum first-year commission would be 20% for a distribution entity and 25% for an agent.

Renewal commissions would also change

The proposal seeks to move away from a system that heavily rewards acquisition of a new policy and towards one that rewards keeping a policy in force.

The proposed renewal commission starts at 2-3% for distribution entities and 5% for agents, depending on the premium-payment term.

From the beginning of the sixth policy year, renewal commission would rise by 0.5 percentage point once every three years, subject to a maximum renewal commission of 7%.

The idea is to make the economics of distribution more closely linked to the period over which the policy remains active rather than concentrating remuneration at the time of sale.

Term insurance gets a different treatment

The proposed commission grid distinguishes between single-premium and multi-year-premium term products.

For an individual pure-term single-premium policy, the proposed maximum is 7.5% for a distribution entity and 10% for an agent.

For an individual pure-term multi-year-premium policy, the proposed ceiling rises to 25% for a distribution entity in the first year and 7.5% on renewal, while 30% for an agent in the first year and 10% on renewal.

Single-premium savings and annuity products

The proposed caps are considerably lower for single-premium savings and annuity products.

For individual single-premium savings products, the proposed maximum is 1% for distribution entities and 2% for agents.

For individual pure-term single-premium products, it is 7.5% and 10%, respectively.

For single-premium pension/deferred annuity/immediate annuity products, the proposed ceilings are just 0.5% for distribution entities and 0.75% for agents.

The paper specifically says there would be no commission for annuity purchases from NPS.

Group insurance and loan-linked insurance

For group pure-term single-premium policies, the proposed maximum is 1.5% for distribution entities, subject to a ₹20 lakh ceiling, and 2% for agents, subject to a ₹30 lakh ceiling.

For group pure-term multi-year-premium products, the proposed limits are 5% for distribution entities and 7.5% for agents in the first year, with 5% and 7.5% respectively on renewal.

For insurance sold by a lending institution along with a loan or credit, the proposed commission is much lower. For individual or group pure-term single-premium policies, the cap is 2%. For multi-year-premium policies, it is 2.5% in the first year and 1% on renewal.

Rural and smaller-city incentives

IRDAI is also proposing additional commission headroom for individual policies sourced from smaller towns and rural areas.

Business procured from towns and cities with populations below 10 lakh, other than the smaller-town category, would qualify for an additional 10% of the applicable first-year commission limit.

Business sourced from towns with populations below 50,000 and from rural areas would qualify for an additional 20% of the applicable first-year commission limit.

This would encourage distributors from serving markets where customer acquisition may require greater effort.