Contextualising the responses to IRDAI's consultation paper on insurance sector reforms, including commission structures, requires tracing the regulatory history back approximately ten years, to when product-specific caps were originally introduced. Compensation paid to brokers, agents, and corporate agents by insurers exceeded the permitted limits. Within the sector, this practice carried a specific designation: overriding commission, commonly abbreviated as ORC.
The oversight body, along with others, was reported to have been aware of the situation. Industry observers attributed the shortage of distribution channels as the underlying cause. Licensing requirements and extended approval timelines placed pressure on operators to offer higher pay within an already limited pool of available workers.
The regulator proposed streamlining the customer registration process. Under the PoSP model, insurance companies and distribution intermediaries could register sales agents through their own certification processes, bypassing the requirement for a standalone licence. Motor Insurance Service Provider (MISP) designation was extended to car dealers under a framework that allowed premiums and commission structures to go largely unmonitored, enabling charges to accumulate without meaningful constraint. MISP placed those entities within a regulatory framework. Both approaches fell short of their stated objectives.
Insurance brokers recognised that a PoSP affiliated with them could distribute products from multiple insurers, rather than being restricted to a single provider. Bringing agents onto brokerage platforms widened market presence, and that expanded footprint gave firms greater leverage in negotiations. Private investors identified the same opportunity, committed substantial funding, built a digital interface around it, and rebranded the sector as insurtech. The underlying business model centred on exploiting fee differentials.
Dealerships adapted over time as well. Automakers launched dedicated insurance broking arms, adjusting dealer remuneration structures so that revenue from financial products would grow as commissions tied to vehicle transactions declined. In certain instances, buyers were pressured into purchasing insurance, with dealers withholding vehicle handover or rejecting cashless claims for those who did not comply. A buyer who had already paid a substantial sum and was still awaiting delivery found themselves with little recourse.
Price comparison platforms established a fresh organised retail crime pathway through call centre bonus schemes, steering consumers towards whichever insurer offered the highest commission. Financial institutions offered products that were deemed inappropriate for certain customers. Data from the banking sector show that more than half of such policies do not reach the five-year mark. By that stage, the payment has already been disbursed and the sales representative has turned their attention elsewhere.
Proposed distribution and regulatory changes were reportedly redirected toward rent-seeking opportunities rather than their stated objectives. Interconnected webs of affiliated businesses were established to handle financial transactions, with the largest distributors running between eight and ten linked entities exclusively to funnel proceeds from organised retail crime. One lending institution offloaded its stake in an insurer at a premium, then bought back a considerably larger position just weeks later at a much lower price. The watchdog subsequently concluded that the method used to set share prices functioned as a form of commission payment.
One common method involved fictitious invoices — charges attributed to call centres, training programmes, and marketing activities for work that was never carried out. Insurance providers took part in the process, competing with one another to construct arrangements offering the strongest legal protections. Oversight bodies issued guidance notices, formal advisories, and financial penalties. Such expenses were treated as routine operational outlays. Fiscal authorities opened an investigation that year.
There is a distinction between a procedural compliance breach and a finance executive facing criminal allegations of tax evasion tied to doctored financial records. Following this, IRDAI abolished individual product-level expense ceilings and introduced a unified Expense of Management (EoM) threshold, enabling ORC to be disbursed as authorised commission.
Sector players identified a previously unrecognised opportunity. Since management expense allowances were tied to a percentage of total premium revenue, insurers found it financially advantageous to pursue large corporate and government contracts at thin or negative margins, which in turn enlarged the pool against which their permitted spending was measured. Those extra authorised funds were directed towards broker and agent commissions. Bulk purchasers were offered reduced prices, with the difference passed on to individual consumers. The action fell within established guidelines.
A new IRDAI consultation paper recommends reinstating stricter fee limits alongside enhanced disclosure and governance obligations, addressing most of the loopholes that had been identified. According to the regulator's own figures, insurance uptake as a proportion of GDP declined from 4.0% to 3.7% between FY23 and FY25. The penetration rate for life insurance declined from 3.0% to 2.7%, a drop that occurred despite a notable rise in commission payouts.
Commissions on motor policies climbed 259% while premiums expanded by 34%, and broker commissions advanced 173% against a 37% rise in premiums. Insurance coverage across the country has lagged behind the pace of its expanding economy, leaving a substantial portion of the population without adequate protection.
The release of the consultation paper coincided with a drop of approximately ₹1.3 trillion in the combined market value of insurance sector stocks within a single day of trading. Banks with a greater dependence on insurance-linked income saw their stock valuations drop more sharply than those of comparable institutions. A lender deriving 12.5% of its earnings from insurance products saw its shares drop 4.6%, while a rival with just 0.6% exposure experienced negligible price movement.
