Lower costs must benefit policyholders, says Irdai chairman

Irdai chairman Ajay Seth said the regulator's consultation paper on sectoral reforms aims to expand coverage, improve affordability and curb mis-selling. He said mis-selling stems from first-year commissions as high as 40-50%, with little reward for persistency, and that 40-50% of grievances received involve unfair business practices. Cost efficiencies should reach customers through lower premiums or better returns, he said. The framework could take effect from January 1, 2027 or April 1, 2027.

Written by AI from Economic Times — Top · not yet reviewed by an editor · Published 28 Sept 2026, 6:05 am IST

Source

Economic Times — Top · read the original report ↗

#irdai#insurance#mis-selling#commissions#regulation

Desk check · compared with the source

What the desk checked (5)

First-year commission on new insurance business is as high as 40% to 50%. — Figure appears in source, attributed to Irdai chairman Ajay Seth in an interview.
About 40-50% of grievances received fall under unfair business practices, a large proportion involving mis-selling. — Attributed to Seth; he himself notes 'unfair business practice' is a broader category.
Life insurance expenses fell from above 20% to around 16.5% and rose back above 20%; general insurance moved from about 30% to 25% and then around 32%. — Figures stated by Seth in source; no underlying data tables cited.
The framework could be implemented from January 1, 2027 or April 1, 2027. — Presented in source as one possibility, not a final decision; consultation paper stage.
Cost efficiencies should be passed on to customers through lower premiums or better returns. — Stated as regulator's expectation, not as an existing rule or outcome.

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Analysts’ view opinion

AI Economic Analyst

At its core this is an attempt to rewrite how the insurance rupee is split — shrinking the share captured by distribution and redirecting it to policyholders through lower premiums or better returns. When first-year commissions run at 40-50%, a large slice of what a customer pays is consumed by the act of selling rather than by savings or risk cover, which is why the regulator treats it as the root cause of mis-selling. But cost savings do not reach customers automatically; they do so only under competitive pressure or regulatory follow-through, a point the chairman himself concedes by framing pass-through as an "expectation".

This is fundamentally a redistribution measure: distributor income falls, with the intended gain flowing to policyholders as lower or more moderate premiums, better savings returns and improved claim ratios.
The expense figures cited — life insurance costs falling from above 20% to about 16.5% and back above 20%, general insurance from around 30% to 25% and then to about 32% — anchor the argument that the industry has operated leaner before.
Heavy upfront commissions with little reward for persistency tilt incentives towards closing the sale rather than suitability, and the claim that 40-50% of grievances involve unfair business practices points to that incentive distortion.
The near-term losers are distribution businesses — agents, bancassurance and digital platforms — and the story notes pushback on the proposed caps has already touched fintech and insurer stocks.
Banning compulsory bundling with loans and folding all payments into the commission cap are attempts to close the leakage routes, so that the saving is genuinely net rather than relabelled.

What to watch — Watch how much of the proposed commission cap survives into the final regulations, and whether the savings actually show up in premiums, returns and claim ratios rather than in margins.

The story conveys the regulator's stated intent on a consultation paper only — it does not establish the final rules, any quantified effect on premiums or returns, or the scale of the hit to distribution incomes and jobs.

Deep dive

Research brief · 8 facts · 5 dates · exam-ready

The brief

Context

The Insurance Regulatory and Development Authority of India (Irdai) has issued a consultation paper proposing wide-ranging reforms to insurance distribution, including caps on distribution costs and commissions, curbs on compulsory bundling of insurance with loans, and a public insurance registry. In an interview, Irdai chairman Ajay Seth explained that the paper's central aim is to enhance value to policyholders by expanding coverage, improving affordability and accessibility, and reducing mis-selling. He links mis-selling to very high first-year commissions and says cost savings must be passed on to customers. The proposals have drawn pushback, especially from digital distributors and fintechs, and will pass through draft regulations and further public consultation before being finalised.

Key facts

Irdai chairman Ajay Seth says the consultation paper's four objectives are to expand coverage, improve affordability, enhance accessibility, and tackle compulsory bundling and mis-selling.
First-year commission on new business is as high as 40% to 50%, with hardly any incentive for persistency, which Seth identifies as the driver of mis-selling.
Of grievances received, 40% to 50% fall under 'unfair business practices', a large proportion of which involve mis-selling.
Life insurance expenses were above 20%, fell to around 16.5%, then rose back above 20%; general insurance expenses were around 30%, fell to about 25%, then rose to around 32%.
The new framework could take effect from January 1, 2027 or April 1, 2027, after draft regulations and public consultation.
Irdai proposes that commission limits include all payments made to distributors, and will closely monitor related party transactions.
A proposed public insurance registry would disclose product information, performance data, grievances against insurers and distributors, and claim settlement speed and accuracy.
The paper builds on the Reserve Bank of India's directions on suitability of products; lenders may seek life cover as security but cannot earn commission on that premium.

Timeline

Seven to eight years agoIndustry operated at lower operating and commission expense levels - life insurance around 16.5%, general insurance about 25%.
Recent periodExpenses rose again - life insurance above 20%, general insurance to around 32%; Irdai imposed penalties in mis-selling cases.
Current stageIrdai issues consultation paper on sectoral reforms; pushback reported over proposed caps on distribution costs.
Next stepDraft regulations to be placed for public consultation, followed by final regulations.
January 1, 2027 or April 1, 2027Possible dates for implementation of the new framework.

Who has a stake

Policyholders / customers — Stand to gain lower or moderated premiums, better returns on savings products, better claim ratios and protection from mis-selling.
Irdai — Seeks to restore cost efficiency, reduce information asymmetry and enforce that policyholder interest is paramount.
Life and general insurers — Face lower permitted expense and commission levels; must compete on price, products and service rather than commission payouts.
Insurance distributors, agents and intermediaries — First-year commissions would fall, with more paid on persistency; conduct records may be publicly disclosed.
Digital distributors and fintechs — Proposed caps are seen as disincentivising their model; insurer and fintech stocks affected by the pushback.
Banks and lenders (bancassurance) — Compulsory bundling of insurance with loans would be prohibited; cannot earn commission on insurance taken as loan security.
Reserve Bank of India — Its directions on product suitability form the base on which Irdai's mis-selling framework builds.

Why it matters

Insurance is a promise paid for today and delivered much later, so high upfront commissions and hidden pricing create large information asymmetry and weaken trust, limiting penetration. If cost efficiencies are actually passed on as lower premiums, better returns and better claim ratios, insurance uptake and coverage could widen. The reform also tests whether distribution-led, commission-driven business models can be redirected towards customer-centric conduct.

UPSC angle

Prelims pointers

Irdai (Insurance Regulatory and Development Authority of India) chairman: Ajay Seth.
First-year commission on new insurance business currently as high as 40-50%, per Irdai chairman.
40-50% of grievances received fall under 'unfair business practices'.
Proposed public insurance registry to support three propositions: know your product, know your insurer, know your distributor.
Possible implementation dates of the new framework: January 1, 2027 or April 1, 2027.
Expense ratios cited: life insurance above 20% (once 16.5%); general insurance around 32% (once about 25%).

Mains framing

Irdai's consultation paper reframes insurance regulation around policyholder value rather than distribution volume. The diagnosis is structural: first-year commissions of 40-50% with almost no reward for persistency incentivise the sale rather than the suitability of the product, and 40-50% of grievances already fall under unfair business practices. Expense ratios that had improved (life to about 16.5%, general to about 25%) drifted back up (above 20% and around 32%), suggesting that flexibility given to the industry was used for commission-led rather than efficiency-led growth, because guardrails were not clearly articulated. The proposed remedies are twofold - realigning incentives by shifting commissions towards renewal years and including all payments to distributors within commission limits, and reducing information asymmetry through a public insurance registry disclosing product performance, grievances and claim settlement, plus curbs on dark patterns such as forcing customers to surrender phone numbers for a quote. Compulsory bundling of insurance with loans would be prohibited unless a package shows demonstrable benefit with guardrails. The risks are transitional: digital distributors argue the caps disincentivise their models, and savings may be retained by insurers rather than passed on. The way forward, as the regulator frames it, is evidence-based consultation, draft regulations, a workable in-company test for mis-selling, and penalties reserved for egregious conduct while systemic incentives are fixed.

Key terms

Irdai: Insurance Regulatory and Development Authority of India, the sector regulator that has issued the consultation paper on reforms.
Mis-selling: Selling a policy that does not meet the customer's suitability criteria, driven here by high upfront sales commissions.
Persistency: Continuation of a policy into renewal years; Irdai wants commissions weighted towards persistency rather than first-year sales.
Public insurance registry: Proposed platform to disclose products, insurer and distributor performance, grievances and claim settlement records.
Compulsory bundling: Forcing insurance cover along with another product such as a loan; proposed to be prohibited absent demonstrable benefit and guardrails.
Dark patterns: Design practices that force or mislead customers, such as demanding a phone number and promotional-call consent before showing a premium quote.

Practice questions

Critically examine how high first-year commissions in insurance distribution contribute to mis-selling, and evaluate Irdai's proposed remedies of commission restructuring and public disclosure.
"Information asymmetry is the central problem in insurance markets." Discuss with reference to Irdai's proposed public insurance registry and curbs on dark patterns.
Will capping distribution costs necessarily benefit policyholders? Analyse the trade-offs between insurer profitability, distributor income and customer value.

Grounded only in the source report — figures and dates are the source's, not inferred.

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