IRDAI rules out glide path for commission caps; open to blended commissions; wants insurance to be bought, not sold: Ajay Seth

The Insurance Regulatory and Development Authority of India’s (IRDAI) consultation paper on distributor commissions is an unusually audacious attempt at a course correction in a sector that, despite years of regulatory intervention, continues to grapple with high costs, mis-selling, low persistency and inadequate value for policyholders.

Backed by data and a detailed diagnosis of what ails the industry, the paper makes a strong case for recalibrating commissions, distribution incentives and the broader cost structure. But the harder question is whether the proposed reforms will actually deliver their intended outcome — lower costs for policyholders, better quality of service and stronger accountability. And can IRDAI enforce a framework this sweeping with its existing organisational bandwidth? In an exclusive interview with Moneycontrol, IRDAI Chairman Ajay Seth takes these questions head-on, explaining the regulator’s thinking on commissions, outcome-linked remuneration, the proposed Public Insurance Registry, enforcement and the safeguards needed to ensure that the gains from reform ultimately accrue to policyholders. Excerpts from the interview:

Q: Two years out, at the end of your tenure, when the dust has settled, what would you want the insurance ecosystem to look like? Since this is a blueprint for the future and completely shakes up the status quo in the sector, are there some system-level goals you have in terms of penetration, new lives insured, persistency, claim settlement, etc.?

Ajay Seth: I want a market where customers make informed choices, rather than one where insurance is primarily push sold. As I said last October, health insurance is at an unstable equilibrium and life insurance at a low-efficiency equilibrium.

The aim is to move both to a sustainable, high-efficiency equilibrium: simpler products, transparent pricing, fairer distribution and stronger accountability, with insurers and distributors commercially viable.

We will track progress on the outcomes that matter to policyholders: wider coverage, better persistency, fewer complaints, fair and prompt claims, affordability and cost efficiency.

The distribution reforms lay the foundation; claims, grievance and product reforms will build on it, supported by the Public Insurance Registry and market infrastructure institutions such as Bima Sugam. The ultimate yardstick is whether the ordinary policyholder gets better value.

Q: Looking at the commission structures around the world, from Australia to the Netherlands and Singapore, which have all seen changes in their commission frameworks and experiments with regulation over the past 15 years, the consultation paper suggests significantly lower commissions compared with other countries. India has charted a fantastic low-cost digital distribution path that is unmatched, but is this enough to justify such low commissions?

Ajay Seth: International experience is useful context, but our proposals rest primarily on Indian evidence and context:

- Our own history: The proposed limits are of the same order as where the industry was six to eight years ago.

- Our own best performers: Two-thirds of life insurance is delivered at total expenses of 11% to 12%.

- The principle of effort: Remuneration should reflect the product, channel and effort involved.

- The need for affordability: We have multiple segments of policyholders which are socio-economically diverse. They all need to have access to insurance — that is a non-negotiable in our journey to Viksit Bharat.

India's digital public infrastructure is certainly a factor. Banking and capital markets have used it to transform costs; you can open a bank or demat account without visiting a branch.

Lower acquisition and servicing costs, through digitalisation and market infrastructure institutions such as Bima Sugam, should benefit policyholders rather than be absorbed in commission-led distribution.

PIR will be a first-of-its-kind Digital Public Infrastructure anywhere in the world. It will completely transform the way information is available to multiple stakeholders and pave the way for a transparent, customer-focused sector.

Q: Do you think, ultimately, the commission structure in the insurance industry should align with that in the mutual fund industry? The industry argues that the complexity of products and the years of engagement are much longer, so the incentives should be larger. Your thoughts?

Ajay Seth: I agree that insurance and mutual funds serve different needs, and protection products often require more persuasion to sell. The proposed framework recognises this by linking commission to product, channel, complexity and effort.

But the argument about long years of engagement actually supports our approach. If a relationship lasts 10, 15 or 20 years, remuneration should be spread across it, not concentrated in the first year.

Today, first-year commission dominates and renewal commission is minimal, which pays distributors to find the next customer rather than look after the current one.

The reforms moderate first-year commission and strengthen renewals, so distributors build a lasting book of loyal customers. The Life Insurance Council itself has suggested persistency-linked commissions.

Q: Several experiments across the world have shown that commission cuts have not improved penetration. How do we ensure this doesn’t happen here? Do you feel there is a possibility of an advice gap? Some countries like Australia, Singapore and the Netherlands have recognised this and built alternative advisory systems.

Ajay Seth: International experience is a useful caution, and we have designed for it.

First, we are not banning commissions, as some countries did; we are calibrating them to effort. Agents in closed architecture get relatively higher limits, and additional commission is proposed for smaller towns and rural areas.

Second, commission is one part of a package that widens access. The proposed reforms include simpler registration, lower capital and fees, Common Service Centres and banking correspondents selling a fuller range, and distributors free to sell other products.

Third, advice remains central. Suitability becomes a real obligation, and fee-based risk advisory can be an alternative model.

Market infrastructure institutions such as Bima Sugam, with the Public Insurance Registry, will reduce information asymmetry.

We will monitor coverage and distribution reach, and recalibrate if evidence shows unintended consequences. The combined effect of these reforms is to enhance value to the policyholder by making insurance affordable and easily accessible.

As I have maintained, for us affordability implies price and quality of service: these are inseparable. Therefore, insurance uptake will receive a boost when the reforms start to take effect.

Q: Lower commissions can sometimes create a deterrent to achieving penetration. Even in the mutual fund industry, where the product has transitioned to being a pull product, B30 growth is not coming easily. Choti SIP did not get enough traction or push. How, then, do you take basic term and health insurance to the masses? Do you agree a national awareness campaign along the lines of the MF industry’s “Mutual Fund Sahi Hai” will be necessary to make insurance a pull product?

Ajay Seth: Taking term and health insurance to the masses requires access, affordability and trust together.

Access: Simpler entry, lower capital and fees, and additional commission for rural areas and smaller towns bring more distributors into smaller markets. Common Service Centres and banking correspondents can sell a fuller range.

Affordability: The GST exemption has shown how reduction in price itself triggered faster growth in retail health and life insurance.

Trust: People buy when they trust the product and the providers and believe claims will be paid.

Awareness matters too. The amended Act provides for a Policyholders' Education and Protection Fund to support sustained awareness efforts, alongside the industry councils' campaigns, Sabse Pehle Life Insurance and Achha Kiya Insurance Liya.

The Public Insurance Registry, with market infrastructure institutions such as Bima Sugam, will make simple products easy to discover, compare and buy, so that insurance is also bought, not merely sold.

Q: Bima Sugam will solve for costs, meaning it will reduce acquisition costs, but how do you solve for information asymmetry, which is a key issue in insurance? The products offered by insurers are not homogeneous. The best policy is different from the best price. How do you address the issue of non-standardisation, which complicates matters? This is where suitability assessment becomes a challenge.

Ajay Seth: You are right: lower costs alone do not solve information asymmetry, and the best policy is not always the cheapest.

Our aim is to make information and comparison a public good. Bima Sugam is the customer-facing purchase layer; the Public Insurance Registry is the underlying information layer that addresses asymmetry.

It will offer comparable information on products, premiums, benefits and exclusions, and on insurer and distributor performance, including claims, grievances and persistency: know your product, know your insurer, know your distributor.

Product and price information must also be accessible without surrendering personal details.

On non-standardisation, the product reforms planned for FY2027-28 will move towards simpler, need-based products that customers can compare.

Suitability then becomes manageable: each sale records the customer's needs and why the product fits, with the seller accountable.

We have issued a consultation paper on the Public Insurance Registry. I encourage all stakeholders to read that, too. The user stories in that paper describe the benefits that will accrue to them respectively and how the PIR intends to change the canvas.

Q: The paper distinguishes between good and bad behaviour among agents, and nudges remuneration towards good behaviour. But the present commission structure does not reward good behaviour comprehensively. Did you consider a blended model of having a base commission cap and variable remuneration based on customer outcomes such as persistency, complaint ratio, claim service quality, suitability, renewals, customer feedback, absence of mis-selling, servicing, and so on? Is this something you think should be taken up at a later stage?

Ajay Seth: What you describe is broadly the direction of the framework.

The proposed limits are maximums, and within them insurers can design remuneration around quality: persistency, servicing, suitability and absence of mis-selling.

The structure itself tilts that way, with moderated first-year commission, stronger renewals, and clawback where mis-selling is established.

What we need first is reliable measurement. The Public Insurance Registry is intended to maintain a structured record of sales personnel performance, including sales quality, renewals, persistency, surrenders, complaints and mis-selling.

Once that evidence base is in place, outcome-linked remuneration can become more granular and credible.

A fully formula-based model across many parameters at the outset could be complex and open to manipulation. But it is a constructive suggestion, and we would welcome detailed proposals in the consultation.

Q: How much organisational bandwidth and strength does IRDAI have to enforce these guidelines when they go through? Also, how do you intend to build the Public Insurance Registry? What would the resource requirements be?

Ajay Seth: Enforcement will rely less on case-by-case inspection and more on design.

Cost audits will be mandatory, with CEO and Board certification. Any payment linked to distribution counts as commission, whatever its form.

Greater public disclosure of market conduct, in standard formats, creates pressure that is often more effective than penalties, which will follow a graded approach under the amended Act.

Data is the backbone. The Act now requires insurers to submit policy and claims records on a concurrent basis, and enables us to authorise a regulated entity or statutory body to perform these information functions.

The Public Insurance Registry will be built on the principle of “protocols, not platforms”, and rolled out in phases, starting with high-value use cases.

A PIR Project Monitoring Unit has been set up to drive implementation. This layered, technology-led approach keeps resource needs manageable.

Q: A matter of detail: the paper is not clear about who gets to pocket the 5 percentage-point difference between broker and agent commissions. Is this to be passed on to the customer?

Ajay Seth: There is no separate pool to be pocketed. A commission limit is a maximum, not an entitlement.

Where a broker's limit is lower than an agent's, it reflects the lower effort in open architecture: a broker can offer products from several insurers, while an agent must make the case for one insurer's products.

A lower limit simply means a lower acquisition cost on that policy.

Insurers cannot redirect the difference elsewhere, since all distribution-linked payments count as commission and overall expenses are capped.

The expectation is that cost efficiencies reach policyholders through lower premiums or more moderate increases, better returns on savings products and stronger claim outcomes. We will keep oversight on where the savings from greater efficiency are going.

Q: The consultation paper has clearly broken the anchor and rattled the industry. How much scope do you see for dilution? Between a reset of rates and a glide path to the suggested rates, what are you more likely to consider?

Ajay Seth: This is a consultation paper, and we will examine every suggestion backed by economic or business logic and shown to serve policyholders.

On the choice between a reset and a glide path, the two elements of the framework are designed differently.

Expenses of management limits follow a five-year glide path with an interim milestone, because restructuring a cost base takes time.

Commission caps deal with the point of sale and mis-selling, an immediate priority. Phasing them could create unintended consequences, such as pushing sales before each lower cap takes effect, which itself could lead to mis-selling.

The proposed approach is therefore a reset on commissions within a phased path on overall expenses. We will place the draft regulations for public comment before the framework is finalised.

Q: Is the consultation paper in line with the government’s thinking in terms of the larger goals and the path to achieve them? These proposals will have to be followed through with equal or greater rigour, with a firm hand, beyond one chairperson’s term to achieve the end objective of insurance for all.

Ajay Seth: Policyholder protection has always been central to IRDAI's mandate. What has evolved is our understanding of what effective protection requires as the market grows larger and more complex.

These proposals are anchored in the objectives of the Sabka Bima Sabki Raksha Act, 2025, passed by Parliament: accelerating growth, better protecting policyholders, improving ease of doing business and strengthening regulatory oversight.

Reducing the cost of intermediation in the financial sector is also an important policy goal on our journey to Viksit Bharat.

On continuity, the strength lies in the process, not any individual.

The Act now requires draft regulations to be published for public comment, with a published response to comments and periodic review. Reforms built on evidence, consultation and outcome monitoring become institutional, and that is what will carry our objective forward.