Bhubaneswar, Oct 17: India’s insurance industry has traditionally operated on the belief that “insurance is sold”. But the Insurance Regulatory and Development Authority of India (IRDAI) wants the sector to embrace a complementary approach: “insurance is also purchased”, with digital platforms enabling customers to make informed choices.

The distinction lies at the heart of the regulator’s proposed overhaul of insurance distribution. Despite growth in premiums, a large proportion of Indian households and businesses remain inadequately protected against financial shocks.

IRDAI Chairman Ajay Seth said on October 15 that effective insurance coverage in India was estimated at around 15% of the population and businesses, a figure that could double to 30% over the next five years. He acknowledged that the 15% figure was his best estimate, as the industry tracks policies and premiums rather than comprehensively measuring whether people are adequately insured.

Also read:India's effective insurance coverage may double to 30% in five years: IRDAI chief

Achieving that expansion will require more than selling additional policies. Affordability, suitable products, reliable claims settlement and customer confidence will be equally important.

These concerns underpin IRDAI’s consultation paper, Recalibrating Economics of Insurance Distribution, which proposes changes to commissions, insurers’ expenses and distribution practices. Stakeholders have been invited to submit feedback by October 25, 2026.

A persistent protection gap

IRDAI’s analysis points to a mismatch between premium growth and the expansion of insurance coverage. It notes that industry growth has broadly tracked gross domestic product, while the number of individual life insurance policies has remained broadly stagnant over the past decade.

Coverage is also geographically concentrated. According to the consultation paper, 66-70% of retail new life insurance business comes from 10 states. In retail health insurance, 10 states account for 80-82% of policies.

The regulator argues that distribution incentives often favour customers who are easier to reach, leaving informal workers, underserved households and micro, small and medium enterprises with inadequate protection. Property insurance is another concern, with many customers purchasing cover primarily because lenders require it.

The problem is not simply how many policies are sold, but whether they provide meaningful protection when households or businesses face illness, accidents or other financial shocks.

The commission debate

The most contentious proposal concerns tighter limits on intermediary remuneration. Commissions help agents, brokers and banks explain products and reach customers, but incentives can also encourage unsuitable sales when remuneration takes precedence over policyholder needs.

IRDAI’s second consultation paper documents wide variations in payouts. For individual life insurance, average first-year commissions ranged from 14% to 51% among insurers, while maximum rates ranged from 33% to 81%. These figures exclude some direct and online business and should not be interpreted as rates applying to every policy.

The regulator also highlights differences in bancassurance arrangements. Its sampled analysis found that total payouts averaged 33% of new business premiums under multiple-bank tie-ups, compared with 13% under single-bank tie-ups.

Policy retention raises further questions. The consultation paper puts the industry’s 61st-month life insurance persistency rate at 48%, compared with 71% for the online channel. While this does not establish that commissions cause policy lapses, it reinforces the need to examine sales quality and long-term customer outcomes.

Industry concerns and regulatory changes

Insurance brokers and insurers have cautioned that tighter commission and expense limits could hurt distributors, threaten livelihoods and reduce access in underserved markets. Industry representatives have also sought a phased transition, arguing that lower payouts will not necessarily translate into cheaper premiums.

These concerns deserve consideration. Distribution requires investment in people, technology and customer service. Abrupt reductions could push smaller intermediaries out of the market. However, the existing system must also be examined for excessive costs and incentives that reward sales rather than suitable, lasting coverage.

IRDAI proposes moving towards a company-level expense-of-management ceiling of 12.5% of gross direct premium income for life insurers over five years. For general insurers, it proposes reducing the limit from 30% of gross written premium to 20% of gross direct premium income over five years, alongside changes to the calculation framework. These remain consultation proposals, not final rules.

Other measures include clearer disclosures of commissions and expenses, cost audits, safeguards against compulsory insurance bundling with loans, stronger action against mis-selling and digital infrastructure such as Bima Sugam.

Measuring meaningful coverage

Doubling effective coverage will require a better way to measure progress. Premium growth and policy numbers alone cannot establish whether India’s protection gap is narrowing. Assessment should also consider first-time coverage, policy continuity, affordability, claims outcomes and access across regions.

The regulator must ensure that cost reductions benefit policyholders without undermining distribution. Insurers and intermediaries, meanwhile, need incentives that reward suitable sales, policy retention and service quality rather than acquisition alone.

Seth has indicated that implementation could begin in January or April 2027, depending on stakeholder feedback, with a draft regulation to follow the consultation.

India needs insurance distribution that is efficient and affordable, but not at the cost of access or customer service. The success of these reforms will ultimately depend not on how much premium the industry collects, but on whether insurance delivers meaningful financial protection when households and businesses need it most.