Insurance reforms: protect policyholders and keep the door open to investors

India is projected to become the world’s sixth-largest insurance market by 2032, underpinned by the vision of ‘Insurance for All by 2047’. This large, underpenetrated market presents a major long-term opportunity for global insurers.

No wonder the decision to permit 100% foreign direct investment (FDI) in insurance in December 2025 was welcomed by foreign investors. By opening the sector fully to foreign capital, the government created room for global technology, expertise and competition in a market where insurance penetration remains far below its economic potential. The move also addresses the long-standing demand of India’s free trade agreement (FTA) partners. Companies from the UK, EU, EFTA countries and the US are closely examining the Indian market.

As foreign investors began preparing business plans and seeking approvals, the Insurance Regulatory and Development Authority of India (Irdai) released a consultation paper on 23 September 2026, titled Recalibrating Economics of Insurance Distribution. The paper proposes to simplify the distribution architecture, improve cost efficiency and enhance transparency. It aims to address mis-selling, forced bundling, opaque incentives, unsuitable products and digital “dark patterns” that can erode trust in insurance.

Investor concerns

All good points, but the market reaction after the paper’s release was somewhat unexpected. Insurance and distribution stocks sold off sharply, and analysts rapidly revised their assumptions for commission-dependent businesses. The reaction showed that the proposals affected not just near-term earnings estimates but also expectations about the durability of existing business models.

One concern could be the absence of a level playing field for new entrants vis-à-vis insurers that have been in the market for years. A mature insurer with a large renewal book and established distribution relationships is fundamentally different from a new entrant. Both need actuarial, risk, technology, legal, compliance and claims capabilities. But an incumbent can spread these fixed costs over a much larger premium base.

If every insurer must pay broadly similar commissions while operating within the same expense ratio, distributors may naturally prefer insurers with the strongest brands, deepest claims networks and largest existing books. This could create an uneven playing field for foreign investors seeking to enter the market or increase their FDI exposure.

An Indian business group may own separate life, health and general insurance companies. The proposal would allow these companies to sell one another’s products through their branches, provided the products do not compete with their own. A new foreign insurer operating in only one insurance segment would not enjoy the same advantage.

Policy predictability

Irdai has every right to design policy. However, insurance is a long-gestation business, and investors need confidence that the regulatory framework will not change frequently.

The consultation paper argues that flexibility in distribution remuneration did not deliver the intended efficiency. Remuneration has risen much faster than premiums, while expense ratios have increased from earlier lows. These are serious findings, but they do not automatically establish that the solution is to reconstruct a detailed grid of regulated commercial terms.

Irdai expects savings from lower acquisition and operating costs to reach policyholders through lower or more moderate premiums, better policy returns or stronger claims outcomes. But such a pass-through is not automatic. Premiums reflect expected claims, reinsurance, capital, operating costs, competition, product design and underwriting, not commissions alone. For regulated products such as motor third-party insurance, reducing commissions may not lower the policy price unless the tariff itself changes.

Rather, customer protection can be strengthened through standardised disclosures, clear identification of sellers, documented suitability checks and demand-and-need assessments. Forced bundling should be prohibited, while proven mis-selling should trigger clawbacks, customer restitution and meaningful penalties.

Evidence before change

Before finalising the regulations, Irdai may consider publishing an impact assessment covering premiums, claims outcomes, distribution reach and new capital, among other parameters. Such data would help justify the proposed regulations and reinforce the message that investors are welcome, policyholders come first, misconduct will be punished and legitimate business models will not be repeatedly reset before earlier frameworks have been properly evaluated.

This would make the reform more durable and help earn the confidence of both policyholders and foreign investors.

Any policy changes must also take into account that the US FTA is still pending, while the EU agreement is yet to go through its parliamentary process. Trade agreements do not take away India’s right to regulate. But regulations must be demonstrably fair, non-discriminatory and transparent.

Arpita Mukherjee, professor, ICRIER. Views are personal.