Prioritise insurance distribution reforms

Source: The post “Prioritise insurance distribution reforms” has been created based on “Prioritise insurance distribution reforms” published in “Business Line” on 28th September 2026.

UPSC Syllabus: GS-3- Indian Economy

Context: IRDAI released a consultation paper on distribution reforms on September 23, acknowledging that the 2023 reforms had not fully achieved their objectives of improving customer benefits and insurance penetration. The proposed reforms focus on commission structures, underserved markets, expense classification and customer-oriented conduct.

Key Issues in Insurance Distribution

1. The existing distribution system tends to favour urban and salaried customers, while underserved rural and small-town markets receive less attention.
2. Commission payouts vary significantly across distribution channels, with brokers and corporate agents receiving substantially higher commissions than individual agents.
3. Despite the growth in premium volumes, there has not been a corresponding increase in the number of insured lives.
4. The existing remuneration system gives limited financial recognition to customer retention, quality of advice, servicing and favourable claim experience.
5. Raising the minimum educational qualification for new agents from Class 10 to Class 12 could reduce the availability of agents in rural areas.
6. The existing system can also encourage short-term acquisition, mis-selling, dark patterns and compulsory product bundling.

Proposed Reforms

1. IRDAI proposes hard, all-inclusive commission caps after finding that the 2023 system of board-approved commission policies had not achieved its intended objectives.
2. The proposed framework recognises that agents tied to one insurer should receive higher remuneration than multi-tied distributors because of their greater role in solicitation.
3. Additional commission incentives are proposed for rural and small-town insurance business to expand coverage in underserved markets.
4. The article proposes an additional 10% incentive for first-time life insurance policyholders, which could help increase the number of insured lives.
5. The Public Insurance Registry (PIR) could be used to identify first-time policyholders once it becomes operational, while proposal forms and IIB records could be used in the interim.
6. Genuine social-security benefits such as gratuity, group term life and health cover should be kept outside direct commission caps.
7. Expenses related to long service, sustained performance, persistency, premium collection, local servicing and agency development should be treated as operating expenses where appropriate.
8. Instead of raising the educational qualification alone, the quality of agents could be improved through better training and higher qualifying standards.

Improving Customer-Centricity

1. The remuneration system should reward long-term customer service, persistence, retention and quality of advice, rather than focusing mainly on new-policy acquisition.
2. Commissions can be linked to effort and complexity, while higher renewal commissions can encourage long-term policy persistency.
3. Measures to curb mis-selling, dark patterns and compulsory product bundling can strengthen customer protection.
4. Better distribution practices can help achieve lower net costs, greater transparency and improved post-sales service.

Way Forward

1. Insurance distribution reforms should balance lower acquisition costs with the sustainability of the individual-agent network.
2. Greater focus should be placed on rural, small-town and first-time insurance customers to bridge the protection gap.
3. Commission structures should encourage good conduct and long-term customer relationships rather than short-term sales.
4. The regulatory framework should be refined gradually and thoughtfully while keeping customer value at its centre.

Conclusion: India’s insurance sector needs to move beyond growth in premium volumes towards wider coverage and more insured lives. A balanced distribution framework that promotes affordability, wider access, good conduct and customer value can contribute to the goal of “Insurance for All by 2047.”

Question: Insurance penetration in India remains inadequate despite growth in premium volumes. Discuss the key issues in insurance distribution and the reforms proposed to make the sector more inclusive and customer-centric.

Source: Business Line