IRDAI New Insurance Rules: Commission Caps, Lower Expense Limits And ‘Dark Pattern' Crackdown Proposed

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a fresh overhaul of the economics and distribution rules for the insurance industry, with tighter commission limits, lower expense caps for insurers and stronger safeguards against mis-selling and deceptive digital practices.

The proposals, released through a consultation paper on September 23rd, could have major implications for insurers, agents, brokers and online insurance distributors.

Brokerages including Bernstein and Jefferies have flagged potential pressure on the earnings of insurance distributors if the proposed commission cuts are implemented as outlined. At the same time, lower distribution costs could eventually benefit policyholders through more competitive pricing and improved value.

The consultation is open for comments from stakeholders until October 25th, meaning the proposals could still undergo changes before final regulations are notified.

What Has IRDAI Proposed?

IRDAI is looking to change the limits on how much insurance companies can spend on managing their business and how much they can pay as commissions to agents and intermediaries.

IRDAI has proposed a five-year path to reduce the amount insurers can spend on distribution and other management expenses.
As per the consultation, For life insurers, the EoM limit would move to a company-level framework linked to Gross Direct Premium Income (GDPI). The proposed limit is 15% within two years and 12.5% within five years.

For general insurers, IRDAI has proposed shifting the calculation from Gross Written Premium (GWP) to domestic GDPI and gradually reducing the limit from 30% to 20% over five years.

IRDAI said the objective is to reduce the overall cost of insurance, expand the risk pool in general insurance and improve returns for policyholders, particularly in life insurance savings products.

The proposed changes would therefore require insurers and distributors to reassess their cost structures and sales economics.

Commission Structure Could See big Changes

IRDAI does not want to have the same commission rate for every insurance product. Instead, the commission limit could vary depending on the type of insurance, the policy, how it is sold, how complicated it is, and the amount of effort required to sell and service it.
For example, under the proposal, commissions on individual non-linked and linked life products for intermediaries could range between 5% and 20%, depending on the premium payment term. For agents, the proposed range is 6.25% to 25%.

For individual pure-term products, the proposed first-year commission is 25% for intermediaries and 30% for agents, followed by renewal commissions of 7.5% and 10%, respectively.

IRDAI Takes At 'Dark Patterns' on Insurance Websites

Another major part of the consultation is the proposed crackdown on dark patterns in digital insurance distribution.

Under the proposal, insurers and distributors would not be allowed to force consumers to submit personal information simply to access basic product information, pricing or features.

This could make it easier for consumers to research and compare insurance products without first becoming sales leads.