IRDAI's proposed commission curbs well-intentioned but flawed: Rajya Sabha MP to regulator | Business News

Rajya Sabha MP Praveen Chakravarty has urged the Insurance Regulatory and Development Authority of India (IRDAI) to revisit its proposed rules for insurance intermediaries, saying the regulator is "justifiably" trying to rein in commissions but its solution is flawed."It is counter-intuitive, then, that IRDAI proposes large cuts in commissions for a role that, by its own admission, is vital to the industry," he wrote in a letter to IRDAI Chairperson Ajay Seth on Tuesday, with a copy to Finance Minister Nirmala Sitharaman.IRDAI's response to the letter was not immediately available.Opinion | Insurance regulator moves to fix the sectorThe letter was in response to a consultation paper IRDAI issued on September 23, titled "Recalibrating Economics of Insurance Distribution". In a bid to regulate the commissions insurers pay to distributors, IRDAI has proposed large cuts. It has also proposed nearly 100 commission rates, spread over four pages and varying by product and distribution channel.The proposal has drawn objections from the insurance brokers' forum and several insurance startups, according to the letter. The eight million brokers who earn their livelihood from the sector are also objecting, Chakravarty said.Chakravarty did not dismiss the regulator's case. He said the paper "is correct in highlighting the problems with the incentive structure" for brokers, and that IRDAI must balance three national goals: wider coverage, long-term capital for national projects and financial stability of insurers”.Opinion | Changing how insurance business is done in IndiaHe said he read both parts of the paper, the Reserve Bank of India's Financial Stability Report and the Economic Survey 2025-26.He also described the regulator's job as a "difficult and delicate task". To reach the vast majority of families, especially in rural areas and among the poor, he wrote, insurance products must be simple to understand and affordable. The industry relies on intermediaries and distributors, whose incentives "must be correctly aligned".Chakravarty’s first objection is that the paper contradicts itself. He pointed to page 25, where it says consumers depend heavily on intermediaries because they cannot compare prices on their own.Insurance, he wrote, is "a complex product that needs to be explained and sold, not understood and bought automatically". The role of the intermediary is therefore vital, and so are the incentives that drive it, he added.Deep cuts in commissions will weaken those incentives, the letter argued. That could lower the quality of intermediation and lead to more mis-selling, the very harm the regulator wants to curb. "IRDAI needs a commission framework that attracts high-quality intermediaries but also penalises them for mis-selling or repeat selling," he wrote.His second objection is the complexity. A schedule of nearly 100 rates over four pages works out to about 25 rates per page. He said India's market is not large enough to carry that burden."We must learn from GST, where a complicated rate structure caused confusion," he wrote. India has 26 life insurers and 45 general and health insurers, 71 in all. He called that "competitive enough to benefit consumers under light-touch regulation".Detailed commission rules, he said, can "harm the growth and innovation of the sector" and turn it into a market of only a few large players. He asked IRDAI to study models in Australia, South Africa, China and the UK and consider a simpler structure.The third concern is balance. A sudden overhaul, he wrote, can disrupt intermediaries and the eight million brokers who earn their livelihood from this work. At the same time, insurers need to keep costs under control and stay "financially viable enough to expand the market".Chakravarty shared the letter in a post on X on Tuesday evening, where he put his case in blunt terms. He said the brokers objecting to the plan are "rightly" doing so, and warned that the proposed structure "can destroy the industry".He suggested the IRDAI regulate the overall cost structure of insurers and fix absolute caps. There would be one cap for plain vanilla products and another for insurance-cum-investment products."In their current form, the proposals do not strike a balance between the national objectives for the insurance sector," he wrote.He asked the chairperson to "review these proposals and evolve a simpler, lighter-touch regulatory framework" that widens insurance coverage, protects livelihoods, keeps insurers financially stable and still prevents mis-selling.