IRDAI's Distribution Reset: Who Loses Margin, Who Keeps the Moat

On 23 September, IRDAI proposed the biggest change to how insurance is sold in India since commission caps were removed in 2023. It wants hard caps on commissions, lower overall expense limits, a ban on forcing insurance on borrowers, and an end to sales incentives for bank staff. Its own data explains why: payments to distributors have been growing four to five times faster than premiums. If the proposals stand, the margin moves from distributors to policyholders, and the moat moves to the insurers that already sell cheaply.

What went wrong, in IRDAI's own numbers

The paper is unusually blunt about the 2023 reforms, which replaced commission caps with an overall expense limit ([C]):

• Costs came back. Private life insurers' total expenses fell from 21.3% of premium in FY15 to 16.5% in FY21, then rose again to 20.2% in FY26. Private general insurers' rose to 32.1% in FY26, "exceeding even its pre 2016 level".
• Distributors captured the growth. Across a sample covering about 92% of life premium sold through corporate agents, new-business premium grew 28% from FY23 to FY25 while distributor remuneration grew 125%. Remuneration is now "nearly 27% of first-year premium".
• Brokers too. Premium placed by general insurance brokers grew 37% over the same period, while their commissions rose 173%. Average motor commissions nearly tripled, to about 25%.
• Credit-linked insurance is the extreme. In the NBFC channel, payouts average around 42% of new-business premium, and 93% of that business is single-premium group credit life sold when the loan is taken.

IRDAI's verdict: "The discipline achieved over a decade has been unwound in the space of a few years and it is policyholders who have funded the reversal" ([C]).

What IRDAI proposes

1. Lower expense limits, with a glide path (FY2027-28 is Year 1) ([C]):

Insurers already below these levels must go further: life to 10% and general to 20% within five years. Insurers that miss the path face "restrictions on new product launches, restrictions on dividend distribution", and in extreme cases on new business through the channel responsible ([C]).

2. Hard commission caps. Selected limits, as a percentage of premium ([C]):

Insurance sold with a loan by the lender gets much lower caps: 5% on first-time health and 2.5% on renewals, 2.5% in the first year of multi-year term life, and nil on motor third party ([C]). The caps are all-inclusive: incentives, awards, trips, gifts and "brand value payments to related parties" all count as commission ([C]).

3. Banks: no compulsory bundling, no staff incentives. Banks and NBFCs could no longer make a loan conditional on buying insurance ([C]). Acceptable packages remain, such as a lower interest rate if the borrower offers term cover as extra security, but only if the premium is paid separately and the borrower may buy it from any insurer. IRDAI also proposes to "prohibit any volume linked or reward linked incentive for bank or NBFC staff selling insurance" ([C]). It says mis-selling "is more prevalent in banks and other banking entities".

The margin: who gives it up

• High-commission insurers. In FY26, private life insurers paid 9% of premium as commission on average, with a range of 3% to 39%. Private general insurers paid "over 20%", with a range of 15% to 31% ([C]). The insurers at the top of those ranges must cut the most, or accept lower growth.
• Standalone health insurers. The paper says they "have largely channelled underwriting margins into commissions and operating expenses rather than lower premiums" ([C]). A 5% cap on renewals by distribution entities goes straight at that model.
• Banks. Bank-led life distribution is large: banks account for nearly ₹68,000 crore of the sampled corporate-agency premium. IRDAI notes that pay-outs are "significantly higher in multiple tie-up arrangements than in single tie-ups" ([C]). Capped commissions, no bundling and no staff incentives together cut the fee income banks earn from insurance. The paper does not quantify this for any bank, and no bank has filed an estimate.

The moat: who keeps it

Focus moat: D3, cost advantage. Under the proposed rules, the insurer that already sells cheaply keeps both its margin and its growth, while a high-cost rival must cut distribution spend or face supervisory limits. IRDAI's own data shows how wide the gap is:

• the largest private life insurer, with almost 10% market share, paid only 4% commission in FY26 against the private average of 9% ([C]);
• the only public-sector life insurer, with 55% market share and mostly selling through individual agents, paid 5% ([C]);
• public-sector general insurers paid 11%, against over 20% at private ones ([C]).

These insurers are already inside the proposed limits. For them the reform is not a cost. It is a constraint on their competitors.

The moat that is weakened is different: D5, cornered resources, in the form of control over the point of sale. The bank branch, the loan desk and the car dealership earned high commissions not for advice but, in IRDAI's words, from "control over customer access". The caps, the bundling ban and the proposed not-for-profit digital platforms such as Bima Sugam are all aimed at that control ([C]). Access that the regulator can price is D8 risk, not a durable moat.

One finding cuts the other way for distributors: persistency. Only 48% of life policies are still running at the 61st month, but for policies bought online the figure is 71% ([C]). Channels that sell policies customers keep have an argument for better treatment. The paper says good market conduct currently earns "nil to low rewards" ([C]), but it proposes no specific mechanism to reward it.

MoatSCORE snapshot

Published MoatSCOREs ([MS]). These have not been re-scored for these proposals.

The paper does not name insurers in its comparisons, so this table does not link any company to a specific figure in it.

The bear case, taken seriously

• It is a draft. Comments close on 25 October 2026 ([C]). The industry will push back, and caps may be raised or phased.
• Lower commissions may mean lower sales. Insurance in India is sold, not bought. IRDAI hopes to change that, but if distributors stop selling, premium growth could slow for everyone, including the low-cost insurers.
• The margin may not reach the insurer. IRDAI wants lower costs passed to policyholders through prices. Lower expense limits constrain insurers too, so cheaper distribution is not automatically higher insurer profit.
• Banks have other levers. Bank-promoted insurers and their parent banks may restructure how distribution is paid. The paper anticipates this, with rules on related-party payments and outsourcing ([C]).

What to watch

1. Changes to the caps after 25 October, especially health renewals and bank channels.
2. Whether the caps apply to renewals on existing policies.
3. Insurers' commission ratios in the September and December quarters, and whether any sales are pulled forward before FY2027-28.
4. Disclosures by banks on insurance fee income.
5. Progress on Bima Sugam.

Sources

• [C] IRDAI, "Recalibrating Economics of Insurance Distribution", Public Consultation Paper (Parts 1 and 2), 23 Sep 2026
• [MS] Moat & Margin, Moat Screener and How MoatSCORE works

Educational research, not investment advice. Every figure above is drawn from IRDAI's public consultation paper, read from the primary document on 28 September 2026. MoatSCOREs are as published on the Moat Screener on that date. No buy/sell recommendations, no price targets. Moat & Margin is not a SEBI-registered Research Analyst or Investment Adviser.