IRDAI’s commission caps: India’s insurance market faces a difficult cost problem. The government wants insurance coverage to expand, but selling policies remains expensive. A large part of that cost is distribution: commissions, incentives and other payments to banks, NBFCs, agents and digital platforms that bring policies to customers. IRDAI’s latest proposal seeks to change how those payments are determined, with consequences for insurers, lenders and the intermediaries that depend on insurance income.
On September 23, 2026, the Insurance Regulatory and Development Authority of India released a two-part consultation paper, Recalibrating Economics of Insurance Distribution. The proposals would change the structure of insurance distribution, tighten expense limits and introduce product- and channel-specific commission caps. The consultation is open for comments until October 25.
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The issue is larger than a reduction in commissions. IRDAI is trying to change the incentives under which insurance is sold. Its concern is that distributors can earn substantially more from some products than others, encouraging them to favour the more lucrative products even when those products do not necessarily match a customer’s needs. The regulator is therefore seeking to make remuneration more closely reflect the effort and complexity involved in selling and servicing a policy.
That does not mean the existing framework has no controls. Under the 2024 regulations, general insurers can spend up to 30% of gross premium written in India on expenses of management, while standalone health insurers have a 35% limit. Life insurers operate under product and business-segment-specific limits. The framework nevertheless gave insurers considerable flexibility in allocating spending between commissions and other distribution expenses.
IRDAI now wants to tighten that framework. Its proposed commission caps would apply to individual products and distribution channels and would be all-inclusive. Commissions would therefore no longer be considered separately from incentives, awards, reimbursements, selling expenses, non-cash rewards and similar payments. The proposal also seeks to simplify the distribution architecture into three broad categories: Insurance Distribution Entities, Insurance Distribution Persons and Market Infrastructure Institutions.
IRDAI’s commission caps: Credit-life insurance faces the sharpest adjustment
Banks and NBFCs are likely to feel the effects most directly because insurance has become an important source of fee income, particularly in loan-linked products.
IRDAI’s consultation paper shows how quickly the NBFC channel has expanded. New business premium sourced through NBFCs rose from ₹3,600 crore in FY23 to ₹10,300 crore in FY25. About 93% of this business was loan-linked group credit life. Payouts to NBFCs reached ₹4,300 crore, or about 42% of the premium sourced. The regulator says commission on these products rose from 5% to 28% over two years and reached about 45% when other payouts were included.
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The proposed cap for credit-life distribution is as low as 2% for single-premium policies. The adjustment would be substantial for lenders that have built a significant business around these products. Insurance commission income accounted for about 26% of L&T Finance’s FY26 profit before tax and 38.4% of Piramal Finance’s FY25 profit before tax, according to analyst estimates cited after the consultation paper. Among private banks, Axis Bank and HDFC Bank have relatively high exposure to insurance fee income.
IRDAI has also proposed restrictions on compulsory insurance bundling with loans. A lender would not be permitted to make insurance a condition for obtaining credit. Where a lender wants portfolio-level protection, it would have to buy a group policy itself and bear the premium. Where insurance is offered to a borrower, the customer would have to be shown loan pricing with and without insurance and given a meaningful choice.
The logic is straightforward. When insurance is offered at the moment a borrower takes a loan, the customer may have little reason to distinguish between the credit product and the insurance attached to it. Reducing the financial incentive for the lender to sell the cover, while making compulsory bundling harder, addresses the two sides of the same problem.
Motor insurance is another area where IRDAI wants substantially lower distribution payments. The consultation proposes nil commission for third-party insurance attached to new vehicles for distribution entities and around 5% for own-damage and related covers in specified cases. The broader principle is that products that are mandatory or require little selling effort should attract lower remuneration than products requiring greater explanation and servicing.
The cost reset extends beyond commissions
The consultation also proposes a five-year reduction in insurers’ expense-of-management limits. For life insurers, the limit would move to 15% of gross direct premium income within two years and 12.5% within five years. For general insurers, the proposed limit would move to 25% within two years and 20% within five years, with the calculation shifting towards domestic gross direct premium income.
That distinction matters because distribution is also the mechanism through which insurance reaches customers. A sharp reduction in remuneration can lower the cost of acquiring a policy, but it can also make some products unattractive for distributors to sell. The result could be lower distribution costs per policy alongside weaker sales of products that are more difficult or expensive to explain and service.
This is particularly relevant to India’s insurance-penetration problem. The country needs wider coverage, including among customers who are currently difficult or costly to reach. A regulatory framework that reduces wasteful payments can improve the economics of insurance. A framework that makes distribution uneconomic can have the opposite effect.
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IRDAI is betting that lower distribution costs, more transparent pricing and digital infrastructure can help shift the market towards customers choosing insurance rather than products being pushed through intermediaries. The regulator has also pointed to platforms such as Bima Sugam and the proposed Public Insurance Registry as part of a broader effort to make insurance easier to compare and purchase.
The proposal therefore puts pressure on more than insurers’ cost structures. For banks and NBFCs, lower insurance payouts could reduce fee income and encourage lenders to seek revenue from other financial products. That could include mutual funds, wealth management and other services, although the extent of any such shift will depend on how the final rules are designed and implemented. Analysts have already identified insurance fee income as a meaningful contributor to earnings at some lenders.
For insurers and distributors, the more important question will be whether the new economics produce a healthier distribution system or simply shrink the number of people willing to sell insurance.
The answer will depend on how the final commission caps are calibrated. Insurance is not a homogeneous product. Selling a mandatory motor cover bundled with a vehicle is different from explaining a complex life policy to a first-time buyer. A uniform approach would risk ignoring that difference; IRDAI’s proposal at least attempts to distinguish products by segment, channel, complexity and selling effort.
The transition could therefore be disruptive even if the longer-term objective is lower distribution costs. Lenders that have come to depend on insurance commissions will have to adjust their fee models. Distributors will have to decide which products remain commercially viable. Insurers will have to find out whether lower acquisition costs translate into lower premiums and wider reach.
That is the central test for the reform. Cutting distribution costs is relatively easy to measure. The harder measure is whether customers end up with more affordable insurance and better choices without making it uneconomic for distributors to sell the protection that India still needs to expand.