The insurance regulator is examining whether spreading commissions across the life of a policy—rather than paying large upfront incentives—could improve customer retention and align agent incentives with long-term policy servicing.
A Proposal to Reshape Insurance Agent Incentives
India’s insurance regulator is considering a significant change in the way life insurance agents are compensated, a move that could reshape the incentive structure across the industry.
The Insurance Regulatory and Development Authority of India (IRDAI) is reportedly in discussions with chief executives of life insurance companies to gradually phase out high upfront commissions paid in the first year of a policy. In their place, the regulator is evaluating a more levelled payout structure that distributes commissions more evenly across the duration of the policy.
Industry officials familiar with the discussions say the proposal reflects growing concern among policymakers about the current front-loaded commission system, in which agents receive a large portion of their earnings when a policy is first sold. Regulators believe that spreading payouts over time could encourage agents to focus more on long-term customer servicing and policy continuity rather than short-term sales.
The discussions come at a time when regulators and insurers are increasingly focused on improving policy retention rates and ensuring that incentives across the distribution network remain aligned with the interests of policyholders.
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Considering a Trail-Like Commission Model
According to people aware of the discussions, IRDAI is examining a trail-based commission structure, similar to the system widely used in the mutual fund industry. Under such a model, agent commissions would be paid gradually over the life of the policy instead of being concentrated in the first year.
Officials say the objective of the proposed shift is to improve policy persistency—the likelihood that customers continue paying premiums and maintain their policies over time. By distributing commissions more evenly, regulators hope agents will remain engaged with policyholders long after the initial sale, encouraging renewals and ongoing servicing.
One senior industry official said the regulator is closely studying the experience of the mutual fund sector, which has witnessed strong growth even after the curtailment of upfront commissions. The sector’s reliance on trail commissions is widely viewed as having encouraged sustained engagement between distributors and investors.
The regulator believes that applying similar principles in life insurance could help align the incentives of agents with the long-term nature of insurance products.
Lessons From Earlier Reform Efforts
The latest discussions build on regulatory proposals that have been under consideration for several years. In 2022, IRDAI released draft guidelines on the payment of commissions and rewards to insurance agents, proposing changes aimed at moderating upfront payouts and increasing renewal commissions.
Under those proposals, the regulator suggested reducing the first-year commission on regular premium life insurance policies from 35 percent of the net premium to 20 percent, inclusive of rewards. At the same time, it proposed raising renewal commissions to 10 percent in subsequent years, compared with the earlier structure of 7.5 percent in the second and third years and 5 percent thereafter.
The draft guidelines reflected an attempt to rebalance incentives within the industry, reducing the emphasis on front-loaded commissions while strengthening rewards tied to continued policy servicing. However, those proposals were not implemented at the time, and the commission structure largely remained unchanged.
New Incentives Linked to Policy Longevity
Alongside the discussion of trail-like commissions, regulators have also previously examined other ways to encourage longer policy retention.
One proposal involved introducing a “longevity incentive” for agents and intermediaries. Under this framework, distributors would receive additional commissions if their clients maintained their policies for extended periods—such as five, ten or fifteen years.
The proposal was designed to reward agents who actively support customers throughout the life of their policies rather than focusing primarily on the initial sale. Although the idea was discussed within the industry, it was not implemented at the time.
The renewed conversations around a levelled commission structure suggest that regulators remain focused on strengthening policy persistency and ensuring that distributor incentives are tied more closely to long-term customer outcomes.
Officials also note that a more balanced commission model is already prevalent in certain segments of the insurance market, including non-life and health insurance, where payouts are more evenly structured over time.
Regulators believe that if distributor payouts decline as a result of the changes, the savings could eventually translate into more affordable premium structures, potentially making life insurance products more accessible to consumers.
The discussions between IRDAI and industry leaders remain ongoing, and no final decision has yet been announced. But the deliberations signal that policymakers are again examining how the economics of insurance distribution might evolve in order to strengthen long-term policy continuity and enhance value for policyholders.
