Insurance commission cuts: Will lower payouts make policies cheaper—or simply hurt distributors?

Insurance regulator IRDAI is proposing tighter limits on commissions paid to agents, brokers, banks and other distributors, raising a key question for policyholders: will lower distribution costs eventually translate into cheaper insurance, or will the savings primarily improve insurers’ profitability? According to The Daily Brief by Zerodha, the answer is not straightforward.

The proposed changes by the Insurance Regulatory and Development Authority of India (IRDAI) seek to reintroduce product-level commission caps and tighten overall limits on insurers’ expenses of management (EOM). The proposals come after a sharp increase in distribution payouts relative to the premiums generated.

Why is IRDAI proposing commission caps?

As highlighted by Zerodha, distributor remuneration in the channels studied by IRDAI grew roughly four to five times faster than premiums between FY23 and FY25.

The gap is particularly visible in the data: remuneration for life corporate agents rose 125%, compared with 28% growth in premiums. For general insurance brokers, distribution remuneration increased 173%, while premiums grew 37%.

At the same time, the number of individual life insurance policies has remained broadly stagnant over the period shown in IRDAI’s analysis.

The regulator's concern, according to The Daily Brief, is that insurers are spending increasingly more on distribution without seeing a proportionate expansion in insurance coverage.

What happens if commissions are cut?

For insurers, commissions are an expense; for distributors, they are revenue. Lower caps would therefore directly affect businesses that depend on insurance sales.

The proposed limits vary by product and distribution channel. For example, The Daily Brief notes that individual term-life insurance first-year commissions currently averaged 51%, with some reaching as high as 81%. The proposed first-year cap for multi-year pure-term policies is 25% for banks and brokers and 30% for agents.

Distributors could respond by reducing customer-acquisition costs, automating parts of their operations or focusing on products that continue to offer adequate remuneration.

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Banks and NBFCs could also see lower insurance-related fee income, while digital insurance platforms and other intermediaries may face pressure to reassess their business models.

Insurance commission cuts: What changes?

Area	What the proposal/data shows	What it could mean
Distributor commissions	IRDAI proposes product- and channel-specific caps	Agents, brokers, banks and platforms could see lower payouts
Life insurance	First-year commissions for individual term insurance averaged 51%, with some reaching 81%	Proposed caps could significantly reduce payouts on some products
Premium vs remuneration	Life corporate-agent remuneration grew 125% vs 28% premium growth	Distribution costs have risen much faster than premiums
General insurance	Broker remuneration grew 173% vs 37% premium growth	Brokers could face significant pressure if caps reduce payouts
Insurer costs	Lower commissions would reduce customer-acquisition costs	Insurers could retain more value from each policy
Customer premiums	Lower commissions do not automatically mean lower premiums	Savings may or may not be passed on to policyholders
Insurer profitability	Lower distribution expenses could improve margins/value of new business	Insurers could use savings to strengthen profitability
Insurance sales	Distributors may find some products less attractive if payouts fall	Sales could slow, particularly where customers need more assistance
Banks & NBFCs	Insurance fees are an income source for lenders	Lower commissions could reduce fee income
Policyholder impact	Final impact depends on premiums, claims costs, competition and product design	Cheaper insurance is possible, but not guaranteed

Will customers get cheaper insurance?

This is where the outcome becomes uncertain.

Lower commissions would reduce the cost of acquiring customers, potentially leaving insurers with more money from each policy. The Daily Brief cites Jefferies estimates that a 10% reduction in customer-acquisition costs could increase life insurers’ value of new business by 5-15%.

But lower distribution costs do not automatically mean lower premiums. Insurers could use the savings to strengthen profitability instead. Premiums will also depend on claims costs, competition, product design and the insurer’s existing margins.

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There is another potential trade-off. If distributors find insurance sales less attractive, insurers could sell fewer policies, particularly to customers who need more assistance in understanding products.

Thus, the proposed commission overhaul could reduce insurers’ distribution costs while simultaneously creating pressure on insurance sales. As The Daily Brief by Zerodha points out, better margins and weaker growth can occur at the same time.

For consumers, the key question will ultimately be whether the savings from lower commissions translate into better pricing and service—or remain within the insurance industry's cost and profit structure.