Mutual funds and insurance may sit on the same financial-services shelf, but they are bought differently. A mutual fund is easy to understand as an investment asset: The consumer puts money in expecting value over time. Insurance is often a “push” product: Exclusions, deductibles, add-ons and claims need explanation, and agents or intermediaries bridge that information gap.
By their very nature for insurance products, the benefit is protection against an uncertain future loss, so the customer may need explanation before buying. That is why agents have traditionally mattered. The Insurance Regulatory and Development Authority of India (IRDAI) consultation paper is the most pervasive reform in decades, virtually overhauling the entire structure of the industry and affecting every stakeholder.
Why is IRDAI reimagining the insurance distribution sector?
IRDAI’s September 23 consultation paper, “Recalibrating Economics of Insurance Distribution”, questions whether the price of intermediation matches the value delivered. It follows the 2023 Expenses of Management (“EoM”) Framework, which gave insurers flexibility over commissions within overall expense limits. IRDAI’s analysis in the report suggests that the intended gains in affordability, penetration and policyholder value did not materialise, while distribution costs rose. In simple terms providing flexibility to insurers led to incremental costs without any direct benefit to the customer.
Parallelly, India has opened insurance to 100% foreign direct investment under the Sabka Bima Sabki Raksha reforms. The consultation also proposes widening distribution: Hospitals, for example, could register as Insurance Distribution Entities (IDE), to sell health insurance, subject to safeguards and lower commissions.
{{/usCountry}}Parallelly, India has opened insurance to 100% foreign direct investment under the Sabka Bima Sabki Raksha reforms. The consultation also proposes widening distribution: Hospitals, for example, could register as Insurance Distribution Entities (IDE), to sell health insurance, subject to safeguards and lower commissions.
{{/usCountry}}The proposed change aims to pivot the entire outlook of the industry to make it more customer friendly by increasing choice and creating a transparent market open for all. The direction is not simply cost-cutting; it is a redesign of who may sell insurance, how they are paid and how consumers exercise choice.
Digital infrastructure is the other half of the reform. Bima Sugam is envisaged as a neutral, not-for-profit market infrastructure platform, while the proposed Public Insurance Registry (PIR) would provide verified information on products, insurers and intermediaries. For a motor customer, the intended direction is towards easier comparison and less dependence on a single sales counter.
The paper also strengthens conduct safeguards: Commission policies would be disclosed, dark patterns would face specific regulation, seller identities would be tagged to policies, and commissions could be clawed back in mis-selling cases. Premiums should move directly from the customer to the insurer, removing unnecessary intermediate fund flows.
What changes for the motor insurance dealers?
The motor insurance industry is expected to be the most severely impacted by this reform, with the most significant proposed change being structural. The IRDAI proposes ending the existing Motor Insurance Service Provider (MISP) framework. Now, eligible motor dealers wishing to distribute insurance would have to register as IDEs. Proprietorships and unregistered partnerships would instead operate as Point of Sale Persons (POS) of an IDE or as associates of one insurer.
For new vehicles, proposed commission ceilings are striking:
- an IDE would receive no commission on mandatory third-party premium and;
- 5% on own-damage, personal accident and legal-liability covers.
The IRDAI’s reasoning is effort-based: A legally compulsory cover at vehicle registration should not command the same remuneration as a product requiring substantial advice. However, lower pay-outs may reduce distribution costs, but they could also make low-premium policies less attractive to sell where physical assistance still matters.
The paper also distinguishes open and closed distribution channels:-
- Open distributors who can offer products from multiple insurers across multiple product categories would generally face lower commission limits;
- Closed distributors selling products of only one insurer would have to accept concentration constraints and may receive higher ceilings.
This may reward commitment, but could it also encourage some sellers to narrow consumer choice? This is one design tension the final framework must resolve. At the showroom, IRDAI aims to make consumer choice more visible. Dealers would have to display the option to buy motor insurance through a Market Infrastructure Institution (“MII”) such as Bima Sugam, including through a QR code, and inform new-vehicle buyers about that route. As stated above, The PIR is intended to provide verified information on insurers, products and intermediaries and support customer-facing digital platforms. The challenge is whether digital comparison can replicate the advice and post-sale assistance customers may still expect from a human intermediary. The final framework needs to ensure that the reforms can also be easily translated in Tier 2 and Tier 3 cities where retail insurance still heavily depend on sales.
What do the reforms mean for the customers?
For consumers, the potential gains go beyond cheaper premiums. Price comparison, direct insurer-customer verification, disclosure without surrendering personal data, direct premium payment to the insurer, seller identification and commission clawbacks for mis-selling could make purchase more transparent and accountable. Dealers should also not deny cashless repairs merely because the policy was bought elsewhere.
Yet lower commissions do not automatically mean lower premiums. Insurers may use savings to strengthen underwriting economics, while distributors may reduce service if remuneration no longer covers advice and post-sale support. Digital platforms can empower informed buyers, but they must mature quickly enough to replace assistance lost at the dealership.The expense reform adds another layer of complexity in the proposed structure. For general insurers, EoM would shift from Gross Written Premium (GWP) to Gross Direct Premium Income (GDPI), with proposed limits of 25% within two years and 20% within five years. This could force efficiencies beyond commissions, but transition timelines and regulatory stability matter, especially as new capital enters an industry now open to 100% FDI.
The real policy question is not whether motor insurance needs cheaper distribution, but how to lower friction without hollowing out useful advice. Can Bima Sugam deliver credible comparison at scale? Will open architecture preserve meaningful choice? Will rural and less digitally confident customers remain economical to serve? The consultation succeeds only if lower costs, stronger conduct and customer choice reinforce one another rather than pulling in opposite directions. The paper remains open to public comments, and final rules may differ.
(The views expressed are personal)
This article is authored by Shubhada Sonwalker, associate, Khaitan Legal Associates.