Insurance commission caps: What happens to your policy when the seller earns less?

IRDAI’s proposed overhaul of insurance distribution could change not only how much distributors earn, but also the economics of buying and renewing policies. The key question is whether lower commissions will reduce premiums or simply alter how insurers and intermediaries sell and service policies.

Motor insurance

Motor insurance faces some of the sharpest proposed changes. For new vehicles, the proposed commission cap is nil for third-party insurance at the IDE level and 5% for own-damage, personal accident and legal-liability covers; agent/associate caps are 2.5% and 10%, respectively.

Shailaja Lall, Partner, Shardul Amarchand Mangaldas & Co., said the changes could “directly affect automobile dealers, OEM-linked brokers, insurers and other motor insurance distributors quite drastically” by reducing upfront earnings and tightening dealer-linked arrangements. She said the effect on product choice and seamless customer service needs careful examination. Dealers would also have to inform customers about digital purchase options, while cashless repair could not be denied because a policy was bought elsewhere.

Health insurance

For individual health insurance, the proposed first-time commission cap is 15% for IDEs and 20% for agents/associates. Renewal commissions would be lower, at 5% and 10%, respectively. Motilal Oswal said distributors could face a meaningful reduction in take rates, particularly in new health business.

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This does not automatically mean a 15% or 20% reduction in premiums. Commission is one component of an insurer’s overall cost structure, alongside claims, administration, technology and other expenses. Whether savings are passed through to customers would depend on insurers’ pricing and the final regulatory framework.

Life insurance

For individual non-linked life policies with premium-paying terms of 10 years or more, the proposed first-year cap is 20% for IDEs and 25% for agents/associates. Renewal commissions would fall to 3% and 5%. The proposal therefore shifts more of the distribution economics away from large upfront payouts and towards a smaller renewal stream.

Source: Motilal Oswal’s analysis of IRDAI’s September 2026 consultation paper.

PoSP economics

The proposed framework reorganises individual sellers into IDP categories, including insurance agents, associates and PoSPs. Motor dealers that do not qualify as IDEs could have to operate as PoSPs of an IDE or through another permitted arrangement. This could change how much of the commission ultimately reaches the individual seller, depending on the commercial arrangement with the IDE or insurer.

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What happens to premiums?

Lower commissions do not necessarily translate into lower premiums. Motilal Oswal expects lower distribution costs could improve insurer profitability, while noting that business volumes could face disruption in the near term. Jefferies estimates the proposed norms could result in 50-66% commission cuts across products from FY28, potentially affecting NBFCs that earn fee income from insurance distribution.

For policyholders, the immediate change may therefore be less about a guaranteed premium cut and more about how insurers, dealers, agents and digital platforms compete, sell and service policies. The final outcome will depend on pricing decisions and the rules ultimately notified by IRDAI.

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