India Plans to Change How Insurance Sellers Get Paid

India's insurance regulator — the government body that oversees the insurance industry — is planning a major change to how insurance sellers get paid. Right now, sellers often receive a large sum of money upfront when they sign a customer up for a policy. The new plan would spread those payments out over the life of the policy instead. Officials hope this will stop sellers from pushing people into buying insurance they don't really need.

The Insurance Regulatory and Development Authority of India, known as IRDAI, is leading this review. Two sources with knowledge of the talks said a draft plan could be shared with the industry within the next four to six weeks. IRDAI's chair, Ajay Seth, confirmed last week that a consultation paper on distribution reform could come out by the end of July. The regulator did not immediately respond to a request for comment.

The main concern is something called 'mis-selling.' This happens when a salesperson talks a customer into buying an insurance policy that isn't right for them. Experts say this can happen because sellers earn a big commission — a percentage of the money the customer pays — right away when a policy is sold. When sellers earn most of their money upfront, they may care more about making a sale than about whether the policy is truly a good fit for the buyer.

Distributors in India can earn commissions of up to 40% of the premium on some life and health insurance products. A premium is the amount a customer pays regularly to keep their insurance active. A large part of that commission is paid at the start. Under the new plan, that money would instead be spread out in smaller amounts over many years, as long as the customer keeps the policy.

This kind of system is already used in big markets like the United States, the United Kingdom, and Europe. Bringing India in line with these countries is one of the goals of the reform. India is one of Asia's largest insurance markets, collecting more than 11.9 trillion rupees — about $125 billion — in premiums every year. Even so, only about 3.7% of the country's total economy is covered by insurance, compared to a global average of about 7.2%.

The regulator is also thinking about linking commissions to how much work a seller actually does. For example, an agent who sits down with a customer face-to-face, helps fill out forms, and assists with claims could earn a higher commission than a bank that simply adds an insurance policy onto another product. This would reward sellers who provide more personal service. Commissions could also be capped based on the type of product, how long the policy lasts, and how complicated it is.

The government has taken other steps recently to make insurance more affordable. Last year, it cut the tax on health and life insurance premiums from 18% all the way down to 0%. It also allowed foreign companies to fully own an Indian insurance business, which brought more international interest to the market. India has more than 60 insurance companies, including big names like Life Insurance Corporation of India, ICICI Prudential, and HDFC Life.

Stricter rules about telling customers how much commission a seller earns are also expected. Making these payments more transparent — meaning easier for customers to see and understand — is another key goal of the reform. Officials believe that when customers know how their seller is being paid, they can make smarter choices about the policies they buy.