NEW DELHI, September 27: The Insurance Regulatory and Development Authority of India (IRDAI) is preparing a major overhaul of the country’s insurance distribution system aimed at making policies easier to buy, reducing inefficiencies, increasing transparency and strengthening protection against mis-selling.
IRDAI Chairman Ajay Seth said the proposed reforms are expected to accelerate digital adoption across the insurance industry while creating new opportunities for distributors and small businesses. The regulator also wants efficiency gains to ultimately improve value for policyholders rather than simply increasing insurers’ margins.
IRDAI Proposes Major Distribution Overhaul
IRDAI released a two-part consultation paper titled “Recalibrating Economics of Insurance Distribution” on September 23.
The proposals cover several key areas, including commissions paid to distributors, insurers’ Expenses of Management, digital distribution, accountability for mis-selling and greater disclosure of insurance-related information.
The regulator’s broader goal is to create a system in which consumers are able to make more informed insurance purchases while reducing unnecessary costs in the distribution chain.
Insurance Buying Could Become More Digital
A major focus of the proposed reforms is increasing the use of digital technology in insurance.
Ajay Seth said insurance continues to lag behind other financial services in digital adoption, noting that consumers can already open bank accounts and conduct many investment transactions digitally.
IRDAI wants insurance purchasing and servicing to move in a similar direction, allowing customers to access more information and complete transactions with fewer physical processes.
Traditional agents and intermediaries are still expected to remain an important part of the system, but they could increasingly use digital tools to serve consumers.
Bima Sugam Could Simplify Insurance Purchases
IRDAI is also developing Bima Sugam, a digital insurance marketplace designed to provide consumers with a simpler and more transparent buying experience.
Seth said Bima Sugam is expected to function as a customer-facing insurance market infrastructure platform, allowing policyholders to access and compare insurance products more easily.
The regulator is also working on a Public Insurance Registry, which would provide a common information and digital infrastructure layer for the insurance ecosystem.
IRDAI Targets Mis-Selling of Insurance Policies
Mis-selling is another major area targeted by the proposed reforms.
The consultation paper contains measures dealing with mis-selling, compulsory bundling, indirect remuneration and digital dark patterns used during the sale of insurance policies.
IRDAI wants greater accountability for the person who directly solicits or advises a customer during an insurance sale.
According to Seth, every sale should ultimately be linked to the person responsible for advising or soliciting the customer, while the organisation for which that person works would also carry responsibility for their conduct.
Public Insurance Registry Could Track Distributor Performance
The proposed Public Insurance Registry, or PIR, could play an important role in improving transparency.
The system could maintain structured information relating to sales personnel and distributors, including their sales quality, policy renewals, persistency, surrenders, complaints and cases of mis-selling.
IRDAI believes greater access to this information could help customers and the market distinguish between distributors that deliver genuine value and those associated with poor sales practices.
Commission and Expense Limits Could Change
The consultation paper also proposes significant changes to how insurance distributors are compensated.
IRDAI has proposed new commission limits across different products and distribution channels, along with a phased reduction in insurers’ Expenses of Management, or EoM.
The regulator has raised concerns that distributor payouts can extend beyond basic commissions through promotional expenses, rewards and other payments.
According to IRDAI’s assessment cited by Moneycontrol, such additional payments have in some cases pushed total distributor compensation 30% to 60% above basic commission levels.
IRDAI Wants Lower Costs to Benefit Policyholders
One of the regulator’s central objectives is reducing the overall cost of doing insurance business.
Seth said private life insurers collectively operate with costs of roughly 22%, while some individual insurers function at substantially lower cost levels.
IRDAI wants insurers to improve operational efficiency and expects those savings to eventually translate into better policyholder value.
Over time, greater efficiency could result in lower premiums or slower increases in insurance costs, particularly while improving returns and value in life insurance products.
Reforms Could Open More Opportunities in Smaller Cities
IRDAI also believes the proposed changes could expand insurance distribution in rural and underserved areas.
The regulator is considering allowing a wider range of organisations, including Common Service Centres, agricultural cooperatives and self-help groups, to participate more actively in insurance distribution.
The draft framework also proposes additional commissions for insurance business sourced from underserved regions, including rural areas and smaller towns, reflecting the greater effort required for last-mile distribution.
IRDAI Says Reforms Could Create More Jobs
Concerns have been raised that tighter commission and expense limits could affect employment among insurance agents and distributors.
Seth, however, said IRDAI expects the wider reform package to create new types of employment opportunities as insurance distribution expands and becomes more digital.
Greater participation from small entrepreneurs and organisations outside major cities could also increase competition and widen access to insurance products.
New Rules Could Come Into Effect Next Year
The reforms are still at the consultation stage and have not yet become final regulations.
IRDAI is examining possible implementation dates including January 1 or April 1 next year, according to Seth.
The regulator will first review feedback from insurers, distributors and other stakeholders before finalising the framework.
The consultation therefore represents one of the most significant proposed changes to India’s insurance distribution system in recent years, with consumer protection, affordability, digitalisation and transparency at the centre of the overhaul.
Source – IRDAI / Moneycontrol
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