Let commissions fall: Why we should welcome the Irdai reforms

Summary

Irdai’s proposed commission reforms are a step forward, but better claims data are needed to ensure consumers can judge not just what insurance costs, but what it delivers.

Between fiscal years 2022-23 and 2024-25, remuneration paid to life corporate agents rose 125%, while new business premium increased 28%, according to a recent consultation paper by the Insurance Regulatory and Development Authority of India (Irdai).

Similarly, broker commissions in general insurance rose 173%, against 37% growth in premiums sold through that channel.

In a country where most households remain uninsured, high, front-loaded distribution incentives do not appear to be widening coverage. These figures echo concerns raised by the inter-regulatory committee on household finance, which one of us chaired in 2017.

Irdai’s consultation papers are therefore a much-needed step towards rationalizing distribution incentives for insurance products.

Insurance contracts are sold by distributors who are paid commissions by insurers. Consumers can rarely discern whether the policy they are sold offers good value. Sales therefore tend to flow towards products on which distributors earn the most, often at the consumer’s expense. Competition does not necessarily fix this.

Insurers compete for distributors, who control access to buyers, pushing up commissions, with the cost ultimately paid out of premiums. Over time, this can erode trust in insurance markets and the industry, plausibly reducing insurance uptake. This is also a central argument about consumer financial markets in Fixed: Why Personal Finance is Broken and How to Make it Work for Everyone, co-authored by one of us with John Campbell.