Reforming Insurance Distribution in India

Syllabus: GS3/Economy

Context

• The Insurance Regulatory and Development Authority of India (IRDAI) is undertaking a comprehensive review of the insurance regulatory framework, with reforms in distribution, intermediary remuneration, pricing and governance emerging as key concerns.

About Insurance Sector & Its Distribution in India

• Insurance is an important aspect of the financial system in India, offering risk protection and long-term savings and investment resources.
• In FY26, the industry’s yearly income was roughly ₹13.4 lakh crore, of which ₹10 lakh crore was from life insurance and ₹3.4 lakh crore from non-life insurance.
• The distribution of insurance is mostly through regulated intermediaries such individual agents, corporate agents, insurance brokers, web aggregators and digital channels.
• Earlier the Insurance Act, 1938 had put statutory restrictions on expenses and commissions.
• The IRDAI’s Expenses of Management (EOM) Regulations, 2024, reduced a number of sub-limits for insurers to have more operational freedom, however the overall EOM ceiling was at 30%.

Significance of Insurance

• Financial Stability: Insurers are connected with banks, capital markets, taxation and government securities.
• Mobilisation of Savings: Life insurers are major institutional investors and providers of long-term funds.
• Risk Management: Insurance supports households, businesses and infrastructure against financial shocks.
• Capital Formation: Insurance funds contribute to government securities and other approved investments.
• Financial Inclusion: Wider insurance coverage can reduce vulnerability to health, agricultural and livelihood risks.
• Economic Growth: A financially sound insurance sector can support entrepreneurship and productive investment.

Key Legislations & Statutory Provisions

• Insurance Act, 1938: The main law governing the business of insurance, including registration, conduct of business and protection of policyholders.
• IRDAI Act, 1999: After liberalisation of the sector for private involvement, to establish IRDAI as sector regulator.
• Insurance Laws (Amendment) Act, 2015: Strengthened the regulatory framework and increased the maximum of authorised foreign investment.
• IRDAI EOM Regulations, 2024: Expense controls rationalised and many sub-limits replaced with an overall framework.
• Ind AS & Risk-based Solvency Norms: Designed to enhance financial reporting, risk assessment and comparability.

Why Does Insurance Distribution Need Reform?

• The liberalisation of the sector in 2000 enhanced competition and led insurers to win business through bigger payments to intermediaries and aggressive pricing. 
• In certain cases, expenses were recorded as marketing, publicity, travel, printing or IT costs, which diminishes the effectiveness of the regulatory constraints.
• The issue is therefore not merely the size of commission but how remuneration influences underwriting decisions, product pricing and risk-taking.

Related Key Concerns & Issues

• Aggressive Pricing: High acquisition costs and low premiums can result in a race to the bottom.
  • The IRDAI has warned insurers against giving steep discounts in the fire portfolio including alleged discounts to the extent of 99 per cent of standard rates.
  • The Reserve Bank of India (RBI) in its June 2026 Financial Stability Report flagged three public sector insurers for continued non-compliance on solvency.
  • The financial pressure has been exacerbated by persistent underpricing, especially in group health insurance, and high costs.
• Governance Gap: There is a disconnect between formal governance policies and actual company practices.
  • Insurers submit board-approved plans to IRDAI, although doubts are raised over internal controls, responsibility and compliance in case of extremely high acquisition expenses or deep premium cuts.
• Concentration Risk: IBAI-McKinsey analysis shows that 10 of 462 brokers account for 70% of the market, raising worries about concentration and bargaining strength.
• Claims and Transparency: Rejection of public disclosure of portfolio-wise claims, outstanding disputes and legal proceedings can show repeating patterns and assist solve the trust deficit in the sector.
• Solvency and Investment Risks: Ongoing losses highlight the need for risk-sensitive solvency regulation, but public sector insurers benefit from substantial capital assistance.
  • Monitoring incremental investments, rather than only gross investment stocks, would provide better insight into insurers’ cash flows and investible surpluses.

Way Forward: Data-Driven Regulation

• Transparency on Intermediaries: Insurers have to report the payments to intermediaries and their partners including indirect payments. This would help to identify concentration risk.
• Claims Transparency: Disclosing repudiated and outstanding claims at the portfolio level, along with their value and legal status, can draw attention to ongoing issues and boost consumer confidence.
• Improved Pricing Information: Long-term data on premiums, claims and intermediary expenses in areas like corporate property and group health insurance can assist regulators in identifying recurrent underpricing.
• Monitoring Investment Flows: regulators need to monitor gross investments, incremental investments and annual investible surpluses.
• Integrated Regulatory Coordination: Financial Stability and Development Council (FSDC) can facilitate sharing of information between IRDAI, RBI and SEBI.
  • Regulatory arbitrage can be traced through the payments between insurers and banks/NBFCs, public-issue disclosures and interconnected financial exposures.

Conclusion

• India’s insurance sector is entering a phase where quality of growth matters as much as growth itself.
• The next generation of reforms should combine transparent intermediary remuneration, stronger claims disclosure, risk-sensitive solvency standards, robust corporate governance and data-driven supervision.
• The objective should not be merely to expand insurance penetration, but to build an insurance market characterised by fair pricing, sustainable underwriting, consumer trust and financial resilience.
• Such reforms can enable insurance to make a larger contribution to India’s long-term investment, social security and economic-growth objectives.

Source: BL