India has made major strides towards expanding financial inclusion through robust digital public infrastructure, rapid innovation in the payments ecosystem, rising digitization and smartphone penetration, and transformative government initiatives such as the Jan Dhan–Aadhaar–Mobile (JAM) trinity.
Yet, despite these advances, India continues to face a substantial gap in insurance penetration, one that is not merely marginal, but a deeply structural barrier to achieving comprehensive financial inclusion and meaningful social security.
As the Insurance Regulatory and Development Authority (IRDAI) grapples with how to close this gap, the IRDAI Annual Report 2024-25, the Economic Survey for FY 2024-25, and the Reserve Bank of India (RBI) Financial Stability Report for 2025, have collectively flagged rising distribution costs and growing instances of mis-selling as structural concerns.
This perspective now sits at the centre of an ongoing deliberation around potential regulatory restrictions on distribution commissions.
While it is a response to legitimate concerns about rising distribution costs and instances of mis-selling, it is worth pausing to ask what such a measure would actually mean for the Indian consumer: will such a step benefit the consumer, or will it have a cobra effect: becoming a solution that makes things worse?
To understand why, consider the profile of a typical first-time insurance buyer in semi-urban India. She is in her late thirties or early forties, runs a small household business or works in the informal sector, earns a modest but irregular income, and is broadly aware of the concept of insurance.
What she does not have is a policy. As per industry estimates, even though 83% of consumers are aware about health insurance, only a mere 19% are policyholders. The gap between knowing insurance exists and holding a policy is not a knowledge problem, it is an activation problem.
For a first-generation buyer, the intermediary is the only viable distribution channel, primarily because of the trust established between the two.
The deeper reason for this lies in insurance literacy. Less than 2% of insurance premiums in India are transacted through online channels and Indian customers consistently prefer offline, face-to-face interactions for complex insurance products.
For instance, individual agents alone accounted for approximately 50% of all individual life insurance policies sold in FY 2024-25. Therefore, the intermediary is not just a sales channel, they are a crucial link between a potential policyholder and the protection they need.
This is why the IRDAI’s own vision document, ‘Insuring India by 2047’, identifies strengthening the intermediary as one of three foundational pillars alongside the insurer and the policyholder. A cap on commissions that diminishes the intermediary’s economic viability directly undermines the policyholder i.e., the consumer.
The distributional effects of commission caps are likely to be most acutely felt by already underserved segments. When distribution incentives weaken, intermediaries tend to reallocate their efforts toward customers whose premium volumes justify the time and advisory costs involved.
Given that high acquisition and servicing costs already deter insurers from actively targeting rural and informal markets, further compression of commissions risks reinforcing this imbalance.
In effect, such caps may deepen existing gaps in insurance access, particularly in life and health segments, by reducing outreach to economically vulnerable and socially disadvantaged groups. Rather than broadening inclusion, the policy could inadvertently widen India’s social protection deficit by limiting engagement where it is needed most.
There is also a real risk that commission caps could potentially undermine consumer interest on the question of cost. Academic research examining the introduction of a commission cap on private health insurance intermediaries in Germany in 2012 found that total acquisition costs of insurers did not decrease significantly. Insurers redirected spending toward other marketing instruments, and the consumer benefit that the cap was designed to deliver never materialised.
In the Indian context, where agent commissions are already embedded in a carefully calibrated Expenses of Management framework, a prescriptive cap could prompt insurers to restructure base premiums upward in order to sustain commission payouts and maintain distributor viability.
The consumer would pay more for a policy that is harder to access. The cap, intended as consumer protection, would function instead as consumer harm.
The human cost of this is also notable. Life Insurance Corporation (LIC) alone has a field force of nearly 1.5 million agents, while the sector overall employs 5.4 million agents.
The average earnings of an LIC agent are between ~INR 10,000 – 20,500 per month. Schemes like Bima Sakhi, which use commission-based insurance agency as a path to economic independence for women, illustrate what this income means in practice. For millions of people, selling insurance is a meaningful source of financial self-sufficiency.
A commission cap shrinks that livelihood, and with it, the incentive to reach the very communities that need insurance most.
Rather than a prescriptive cap, the measured path is to build on the regulatory architecture India already has. It is worth recalling that IRDAI itself moved away from product-level commission caps in 2023, replacing them with Expenses of Management (EOM) Regulations which give insurers the flexibility to calibrate distributor compensation to the economics of different product lines, geographies, and customer segments.
Reverting to commission caps would undo that deliberate choice. Before any further steps, a structured study of the actual drivers of rising acquisition costs would allow any future intervention to be calibrated to the evidence rather than risking the spillover effects.
Policyholder protection from mis-selling deserves a response proportionate to where the problem is concentrated. Focused measures such as RBI’s Draft Directions for Commercial Banks may be better suited to address the issue.
Notably, IRDAI’s Annual Report also recommends insurers implement “distribution channel-specific controls” and periodic root cause analysis: measures that target the specific issue rather than the entire distribution ecosystem.
Ultimately, prescriptive commission caps risk producing the very harms they seek to prevent higher premiums, reduced accessibility, and a distribution network that retreats from those who need it the most.
The flexibility built into India’s existing regulatory framework should be deepened, not abandoned. The 2047 goal will be achieved by placing the consumer’s interest at the forefront, which is best served by an economically viable distribution ecosystem which is also regulated to ensure consumer protection and efficient economic outcome.
Disclaimer
Views expressed above are the author’s own.
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