IRDAI Proposes Insurance Commission Caps, Clawback for Mis-Selling

The draft framework would introduce separate distribution categories and commission limits across life, health and motor insurance, while bringing incentives and non-cash benefits within the proposed rules.

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a major overhaul of how insurance distributors are compensated, including caps on commissions and the possibility of recovering commissions in cases of mis-selling.

The proposals are contained in a draft consultation framework that seeks to bring greater consistency to payments made to agents, brokers and other insurance distribution channels.

At present, insurers do not operate under a single numerical ceiling for distributor commissions. Payments are instead governed within the broader Expenses of Management (EoM) framework.

Under the proposed system, IRDAI would prescribe maximum commission levels for different products and distribution categories. The regulator also wants incentives, awards, selling-cost payments, brand-related payments, gifts and trips to be considered when determining distributor remuneration.

One of the most significant changes would be the introduction of commission clawbacks, allowing insurers to recover payments in specified cases where a policy is subsequently found to have involved mis-selling.

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Three Distribution Categories Proposed

IRDAI has proposed organising insurance distribution around three categories:

Distribution channel	Entities covered under proposal
Insurance Distribution Entities (IDEs)	Corporate agents and brokers
Insurance Distribution Persons (IDPs)	Individual agents and point-of-sale representatives
Market Infrastructure Institutions (MIIs)	Bima Sugam

Both IDEs and IDPs would be eligible for commission-based remuneration, with the proposed rates generally differing between the two categories.

The framework would therefore replace a more flexible commission environment with product-specific limits and defined distributor classifications.

Life Insurance Commission Would Face New Limits

For traditional individual life insurance policies with a premium-paying term of 10 years or more, the proposed maximum first-year commission for agents would be 25% of the premium, while distribution entities would have a lower proposed limit of 20%.

The proposed rates would vary according to the premium-paying period.

Proposed Maximum Commission for Standalone Individual Life Products

Premium-paying term	Distribution entities: first year	Distribution entities: renewal	Agents: first year	Agents: renewal
Below 5 years	5%	2%	6.25%	5%
5 years	10%	2%	12.5%	5%
6–8 years	14%	3%	17.5%	5%
9 years	18%	3%	22.5%	5%
10 years and above	20%	3%	25%	5%

The proposal also sets out separate rates for other life insurance products.

For example, individual pure-term policies with multi-year premiums would have a proposed first-year commission ceiling of 25% for distribution entities and 30% for agents. Renewal commissions would be capped at 7.5% and 10%, respectively.

Single-premium pure-term policies would have proposed limits of 7.5% for distribution entities and 10% for agents.

Other Life Products Would Also Have Specific Caps

The draft provides separate limits for savings, pension, annuity and group products.

Among the proposed figures:

• Individual savings, single premium: 1% for distribution entities and 2% for agents.
• Pension/deferred annuity/immediate annuity, single premium: 0.5% and 0.75%, respectively.
• Pension/deferred annuity, multi-year premium: 5% for distribution entities and 6.5% for agents in the first year.
• Group pure-term, multi-year premium: 5% for distribution entities and 7.5% for agents.
• Group fund-based products: 0.5% of annual contributions, subject to separate monetary limits.

These proposed rates would make remuneration more directly dependent on the type of policy being sold rather than leaving commission levels primarily to individual insurer-distributor arrangements.

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Health Insurance Commission Structure Would Also Change

Health insurance would come under another set of proposed limits.

For individual health insurance, the draft provides different rates for new business, renewals and portability.

For individual policies, the proposed maximums are:

• First-time policy: up to 20% for agents and associates.
• Renewal: up to 10%.
• Portability: up to 10%.

The consultation paper also proposes lower rates for distribution entities in the detailed channel-wise structure.

Interestingly, porting an existing health insurance policy would be treated as a renewal for commission purposes, rather than as entirely new business.

For group health insurance, the proposed commission would generally be lower and subject to monetary ceilings.

Proposed Health Insurance Commission Structure

Policy type	Nature	Distribution entities	Agents and associates	Hospitals
Individual	First time	15%	20%	5%
Individual	Renewal	5%	10%	NA
Individual	Porting	5%	10%	NA
Group: Employer/Employee	First time	5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh
Group: Employer/Employee	Renewal	5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh
Group: Employer/Employee	Porting	5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh
Group: Non-Employer/Employer	First time	2.5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh
Group: Non-Employer/Employer	Renewal	2.5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh
Group: Non-Employer/Employer	Porting	2.5%, max ₹100 lakh	5%, max ₹100 lakh	1%, max ₹25 lakh

IRDAI has also indicated that renewal commissions should generally remain below first-time sales commissions. The stated objective is to reduce incentives for distributors to push products primarily because of the commission attached to a sale.

Motor Insurance Gets Much Tighter Limits

The proposed commission structure is particularly restrictive for motor third-party insurance.

For agents and associates, the proposed rates include:

• Third-party insurance for a new vehicle: 2.5%
• Third-party insurance for an old vehicle: 5%
• Own damage/PA/legal liability for a new vehicle: 10%
• Own damage/PA/legal liability for an old vehicle: 15%

For third-party motor insurance sold alongside loans or credit, the proposed commission for agents would be nil.

The detailed framework also provides different limits for distribution entities and garages.

Proposed Motor Insurance Commission Rates

Insurance type	Vehicle	Distribution entities	Agents & associates	Garages
Third Party	New	Nil	2.5%	NA
Own Damage/PA/Legal Liability	New	—	10%	NA
Third Party	Old	2.5%	5%	2.5%
Own Damage/PA/Legal Liability	Old	10%	15%	10%

Smaller Towns Could Get Higher Commission Limits

The proposed framework does not apply exactly the same ceiling everywhere.

IRDAI has proposed additional commission headroom for insurance business generated in rural areas and smaller towns, where insurance penetration is lower.

For rural areas and towns with populations of up to 50,000, agents could receive an additional amount of up to 20% of the normal first-year commission limit.

For cities with populations of up to 10 lakh, the additional limit could reach 10% of the normal commission limit.

The additional amount would apply to the commission limit rather than being calculated as a percentage of the premium itself.

IRDAI says the proposal is intended to support insurance distribution in underserved markets and make it more attractive for people in smaller locations to participate in the insurance distribution network.

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Incentives and Gifts Would Also Count

The proposed framework takes a broader approach to defining commission.

Insurers and distributors would not be able to treat additional compensation as something separate merely by changing its label.

The proposed definition would include:

• Basic commissions
• Incentives
• Awards
• Selling-cost payments
• Brand-related payments
• Gifts
• Travel and other non-cash benefits

This provision is intended to bring different forms of distributor compensation under the same overall regulatory framework.

Mis-Selling Could Trigger Commission Clawback

One of the most important consumer-protection provisions is the proposed clawback mechanism.

Under the draft framework, insurers and agents would be expected to document the customer’s requirements and assess whether the product being sold is suitable for those needs.

The identity of the person responsible for selling the policy would also be linked to the insurance contract.

If a case of mis-selling is subsequently established under the applicable framework, the commission paid to the distributor could be recovered.

The proposal also calls for greater public availability of information relating to mis-selling and the performance of insurers and distributors.

This would make distributor accountability more directly connected to the policies they sell.

IRDAI Also Wants Lower Overall Insurance Expenses

The commission proposal forms part of a wider attempt to reduce insurance companies’ operating expenses.

For life insurers, IRDAI has proposed reducing the Expenses of Management limit to 15% of premium within two years, followed by a further reduction to 12.5% within five years.

For general insurers, the proposed framework would move toward a 20% limit on domestic premium within five years, compared with the existing 30% Gross Written Premium framework referenced in the proposal.

According to the consultation proposal, reducing operating costs could create more room for insurers to price products competitively while potentially increasing the funds available for claims and customer returns.

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Commission Payments Could Reach Distributors Faster

The draft also addresses when distributors should receive their commissions.

Where a policy has a free-look period, commission would be payable no later than the day after that period ends.

IRDAI has additionally proposed that insurers should make efforts to release commissions within seven days of receiving the premium.

If a policy is subsequently cancelled and excess commission has already been paid, the insurer could recover that amount through the proposed clawback mechanism.

What the IRDAI Proposal Could Change

If the draft rules are adopted in their proposed form, insurance distribution would move toward a more clearly defined commission structure across major product categories.

The proposal combines several changes rather than relying only on commission caps:

• Product-specific remuneration limits
• Separate treatment of distribution entities and agents
• Lower renewal commissions in several categories
• Additional limits for underserved locations
• Inclusion of incentives and non-cash benefits
• Customer-needs and suitability records
• Potential commission clawbacks for mis-selling
• Greater public disclosure around mis-selling and performance
• Faster commission payment timelines
• Lower overall expense limits for insurers

The figures remain part of a draft consultation proposal, so the final regulatory framework may differ from the numbers currently outlined.

Frequently Asked Questions

What has IRDAI proposed regarding insurance commissions?

IRDAI has proposed maximum commission limits for different insurance products and distribution channels, covering life, health and motor insurance.

Can insurance agents lose their commission under the proposal?

Yes. The draft provides for commission clawback in cases involving mis-selling, subject to the applicable rules and findings.

Will insurance renewal commissions be capped?

Yes. The proposal includes separate renewal commission limits, with renewal rates generally lower than first-year commissions.

What is the proposed commission for individual term insurance?

For individual pure-term insurance with multi-year premiums, the proposed maximum is 30% for agents and 25% for distribution entities in the first year. Proposed renewal limits are 10% and 7.5%, respectively.

What is proposed for health insurance commissions?

For individual health insurance, the detailed proposal provides up to 20% for agents and associates on first-time policies, 10% on renewals and 10% on portability. Distribution entities have separate lower limits in the detailed structure.

What is the proposed motor insurance commission?

For agents and associates, the proposed rates range from 2.5% to 15%, depending on the type and age of the vehicle and the insurance cover.

Will gifts and travel benefits count as commission?

Under the proposal, incentives, awards, selling-cost payments, brand payments and non-cash benefits such as gifts and trips would also be considered within the broader remuneration framework.

Are these IRDAI commission limits final?

No. The material supplied is based on a draft consultation proposal. The final rules may change following feedback and the regulatory process.

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