IRDAI to introduce new rules for insurance agents' commission and distribution expenses

The Insurance Regulatory and Development Authority of India (IRDAI) is preparing to implement new rules regarding the commission of agents selling insurance policies and the distribution expenses of insurance companies. These rules are being finalised and could have a direct impact on insurance companies and their agents. The primary objective of these new regulations is to control the distribution costs of insurance companies and protect the interests of customers.

Regarding these proposed changes, R. Doraiswamy, CEO and Managing Director of the Life Insurance Corporation of India (LIC), shared his reaction in an interview with a news agency. He stated that LIC does not expect to face significant difficulties from these new rules, as the company is already operating within most of the proposed limits. According to Doraiswamy, LIC has always kept the expenses incurred on the distribution network for selling policies limited. The company also sets its own internal limits on other distribution-related expenses apart from commissions.

He further added that the proposals presented in IRDAI's consultation paper are, in most cases, within LIC's scope. However, he admitted that changes might be necessary for certain specific products and during certain periods of regular premium policies. If any product needs to be withdrawn, modified, or refiled due to the new rules, an impact may be observed. Insurance companies that currently have higher distribution costs may face more pressure due to these new regulations.

The biggest concern for agents is regarding their commission. As IRDAI's proposed rules are currently under consideration, it is too early to say how much the agents' commission will decrease or how their earnings will be affected. R. Doraiswamy clarified that LIC intends to protect the long-term interests of its agents and described the agents as partners in the company's progress. LIC has sent its suggestions and feedback to the regulatory body (IRDAI). The company hopes that the concerns of insurance companies and distribution partners will be considered while framing the final rules.

Historically, separate limits were previously applicable to commissions. Subsequently, the commission limits were removed, and a system of rules linked to the Expenses of Management (EOM), or total management costs, was established. Following this change, distribution costs for companies increased, which is why IRDAI is now considering bringing in new rules for commission and distribution expenses. According to Doraiswamy, steps to improve the pricing of life insurance and the method of doing business could prove beneficial for the entire industry.

Speaking of LIC's business aspects, the company's Value of New Business (VNB) margin has increased to 22.3%. In simple terms, the VNB margin indicates the expected future profit the company will earn from newly sold policies. This improvement is due to a better product mix and a greater focus on non-participating policies. In non-participating policies, the policyholder does not receive a share in the company's profits, whereas participating policies may offer bonuses or other benefits. LIC is now moving towards maintaining a ratio of approximately one-third and two-thirds of these two types of products in its business.

In the upcoming financial year 2026-27, LIC's primary focus will be on the expansion of various types of insurance products. This mainly includes individual term insurance, savings plans, annuities, and Unit Linked Insurance Plans (ULIP). The company plans to strengthen its portfolio through these products. In today's time, these steps by IRDAI are considered important for bringing transparency to the insurance sector and reducing costs, which will ultimately provide better services and policies to customers.

According to reports, all these changes could bring a major transformation in the functioning of the insurance industry, especially in the earnings of agents and the cost structure of companies.