Insurance regulation: Reform must strengthen the market, not weaken its foundations

Proposals to restructure commissions paid to insurance intermediaries raise a fundamental question: will reform strengthen insurance, or weaken the system that makes protection accessible?

Before liberalization, insurance operated largely under public ownership. Competition, innovation and awareness were limited, penetration was low, and distribution infrastructure struggled to reach India’s diverse population.

Insurance is built on trust: policyholders pay today for a promise that may be fulfilled years later. Benefits and exclusions require explanation. Agents became central to life insurance, while general insurance focused more on commercial and compulsory requirements.

Private participation aimed to create a competitive, professionally managed and financially sound market. Since competitors would also benefit from greater public awareness, no insurer could bear that cost alone. Development therefore became part of the regulator’s mandate.

Liberalization strengthened agency through training, licensing and supervision, and introduced brokers to assess risks, compare products and secure suitable protection. Agents represented insurers; brokers were conceived as independent professionals representing policyholders, though paid by insurers. Their distinct roles justified different regulatory requirements.

This distinction supported a policyholder-oriented market. Equal treatment should apply to equivalent risks, not erase differences in independence and accountability.

Beyond commission cuts

The proposals assume that lower commissions and management expenses will make insurance more affordable and improve penetration. That requires evidence. Distribution expenditure is not automatically wasteful: it funds customer acquisition, advice, renewals and claims assistance, especially for small businesses, rural households and first-time buyers.

Commission may appear as an insurer’s expense, but it can finance the work that makes a policy meaningful. Treating it as a cost to compress confuses expenditure with inefficiency. Misconduct requires targeted enforcement, not blanket cuts or merged intermediary categories.

The consequences could determine who can afford to distribute insurance, which customers remain viable, and how much support policyholders receive.

Will customers benefit?

Lower remuneration does not automatically mean lower premiums. Pricing also reflects claims, underwriting, reinsurance, medical inflation, administration, investment returns and competition. Savings may be absorbed elsewhere or disappear through repricing. Former Irdai member Thomas Devasia has questioned comparisons between different insurer business models.

Irdai should demonstrate premium savings, better claims outcomes and wider coverage. Without evidence, consumer benefit remains an assertion. The regulator must examine insurance’s total economics, rather than assume that one cut benefits customers.

The wider cost

Sharp cuts, particularly in group health and some motor insurance, could make smaller accounts uneconomic. Small enterprises and individuals often need more explanation, documentation and claims support relative to their premiums. If remuneration no longer covers these costs, intermediaries may withdraw, cut staff or serve only profitable customers.

Businesses could close, jobs and recruitment could fall, and services could disappear from less profitable markets. Agents, point-of-sales persons, brokers, motor networks, insurance marketing firms and service providers form an ecosystem built through investment, training and relationships. Its viability cannot be radically altered without assessing the consequences.

MSMEs, senior citizens, rural households and first-time buyers could lose access to advice and claims assistance. A cheaper policy without support is not necessarily better protection. With penetration still low, weakening distribution could undermine inclusion.

Accountable regulation

Irdai must remain firm on solvency, governance, mis-selling, claims and policyholder protection. Good intentions cannot replace evidence and proportionality. Insurers’ boards are responsible for commercial strategy; regulatory intervention should not displace competition without compelling justification.

Independence does not mean freedom from accountability. Decisions must be evaluated against penetration, grievances, claims, service quality and consumer savings. Claim delays, repudiations, poor disclosures, complicated wording and weak grievance redressal need attention. Responsibility for mis-selling must be assessed fairly across insurers, products and distributors.

Before major changes, Irdai should commission independent economic, actuarial, competition and employment assessments, disclose its assumptions and evaluate alternatives. A differentiated framework recognising distributors’ roles would better reflect market realities. Change should be gradual and linked to policyholder welfare.

Inefficiencies must be corrected, but an architecture built to professionalise distribution should not be weakened without evidence that its replacement will deliver better outcomes.

Irdai’s mandate encompasses both regulation and development. Development cannot come from weakening the networks that connect Indians to protection. Insurance for All by 2047 requires wider distribution, expertise, sustainable employment and confidence.

Success must not be measured by commissions eliminated, but by how many more Indians obtain meaningful protection, how fairly claims are settled, and how effectively insurance serves society. Reform must strengthen liberalisation’s foundations, keeping policyholders at the heart of regulation through measurable outcomes.

N Rangachary, former chairman and founding chairman, Insurance Regulatory and Development Authority of India (Irdai)