The concerns are set out in IRDAI’s consultation paper on distribution reforms, which argues that the insurance sector’s current distribution model often rewards premium collection rather than customer value, affordability and long-term policyholder outcomes.
The regulator’s analysis found that banks accounted for nearly ₹68,000 crore of sampled corporate-agency premium in life insurance. It said payouts were significantly higher in multiple tie-up arrangements than in single tie-ups, suggesting that remuneration may be driven more by competition for distribution relationships than by the actual effort involved in selling insurance.
The finding is important because banks are a major distribution channel for insurance, giving them direct access to customers through branches and lending relationships.
IRDAI has effectively questioned whether distributors should be rewarded primarily for the value they create for customers or for their ability to negotiate higher payouts from insurers because they control access to customers.
“Money should move where it belongs,” the regulator says in its strategic framework for reforms. Among its proposals are direct payment of premiums from customers to insurers and a verified direct connection between the customer and insurer before a policy is issued.
Customers often cannot see the cost of distribution
The consultation paper also flags a broader transparency problem across insurance distribution.
IRDAI says customers at key points of sale, including bank branches and loan desks, typically have little visibility into the commission embedded in the insurance premium and limited ability to influence the cost of distribution. This, it says, makes it harder for customers to compare products independently and weakens competitive pressure on pricing.
The regulator links this problem to the wider information imbalance in insurance. Insurers and distributors have considerably more information about products, costs and suitability than customers, while remuneration can vary materially across products.
That creates an incentive to favour products that pay more, even when they may not be the best fit for a customer, IRDAI says. Such incentives can contribute to unsuitable sales, policy lapses and surrenders, and weaken trust in insurance.
The issue is not limited to banks. IRDAI says distributor remuneration in a representative sample of the life insurance corporate-agency channel rose 125% between FY23 and FY25, compared with 28% growth in new business premium. Distributor remuneration now accounts for nearly 27% of first-year premium, while rewards and incentives add another 30% to 60% over base commission.
The regulator says this means base commission alone does not capture the full cost of acquiring insurance customers.
IRDAI wants commissions tied to effort, complexity
The proposed reforms would move away from a system in which insurers have broad flexibility over distributor payouts.
IRDAI has proposed prescriptive commission limits for different insurance segments, lines of business and distribution channels, with the limits taking into account factors such as product complexity and the effort required to sell a policy.
The regulator also proposes reducing the number of layers in distribution, considering all payments made to distributors when determining commission limits and distinguishing between open and closed distribution architectures.
For closed-architecture distributors, where the range of insurers that can be offered is restricted, IRDAI proposes higher commission levels. For open-architecture distributors with a wider scope of distribution, it proposes an opportunity-based commission framework.
The aim is to make distributor remuneration reflect the work involved in selling and servicing insurance rather than simply the distributor’s negotiating power.
Bancassurance is not being abolished
The consultation paper does not call for an end to bancassurance. Instead, it seeks to change the incentives around insurance distribution and give customers more direct control over how they buy policies.
IRDAI wants customers to be able to compare products and services more easily, expand the scope for direct purchases and receive clearer information about insurers, products and distributors. It also proposes publicly disclosing the expense and commission performance of insurers and large distributors.
The regulator has also proposed a digital, “pull-based” alternative to traditional insurance distribution through Market Infrastructure Institutions, including Bima Sugam. The idea is to allow customers to actively seek and compare insurance products rather than relying entirely on an intermediary to sell a policy.
The broader objective, IRDAI says, is to shift insurance from a market where products are primarily “sold” to one where insurance can increasingly be “purchased” by informed customers.
For banks, insurers and other large distributors, that could mean a significant change in the economics of insurance sales: access to a large customer base may no longer by itself justify substantially higher payouts.
The consultation paper ultimately puts the question more bluntly: should distributor remuneration reflect the effort involved in advising and servicing customers, or the intermediary’s ability to negotiate higher payouts because it controls customer access?