IRDAI's draft commission caps: what banks and NBFCs that sell insurance stand to lose

On 23 September 2026 IRDAI released a consultation paper, "Recalibrating Economics of Insurance Distribution", that would bring back product-level commission caps and set them lower for banks, NBFCs and other distribution entities than for insurers' own agents. Comments close on 25 October 2026. For bancassurance and NBFC partnership heads the answer is plain: if the draft survives, first-year income on regular premium life falls by about a quarter, credit-linked cover becomes close to a processing fee, and pay has to follow persistency and suitability rather than volume. This is still a proposal, not a regulation.

What exactly has IRDAI proposed?

The paper has two parts: the reforms, and IRDAI's analysis of distribution costs. The main pieces, as summarised by Khaitan & Co, are:

• One licence for entities. Corporate agents, brokers, IMFs, web aggregators, CSCs and MISPs would fold into a single Insurance Distribution Entity (IDE) licence, each with the option of open architecture.
• Lower expense limits. A glide path starting in FY 2027-28 takes life insurers' Expenses of Management limit to 15% of premium within two years and 12.5% within five; general insurers go to 25% and then 20%.
• All-inclusive caps. Commission would cover incentives, awards, reimbursed selling expenses, brand payments to related parties and non-cash benefits such as trips.
• Conduct rules. Clawback on mis-sold and cancelled policies, enforceable suitability, and every policy tagged to the person who sold it.

The 2025 insurance laws amendment gave IRDAI the power to prescribe commission caps. Draft regulations still have to be published for comment, so at least one more round is due.

How far below today's payouts are the proposed caps?

IRDAI's own FY2025 data, as reported by Outlook Business and ThePrint, shows how large the gap is. The table sets current averages beside the proposed IDE cap.

Two points matter for planning. Average first-year commission to NBFCs ranged from 42% to 67%, according to Kotak Institutional Equities as quoted by Outlook Business, so NBFCs face the steepest cut. Insurance packaged with a loan gets its own lower caps whatever the product line.

Why does open architecture attract the lower cap?

IRDAI's principle is that entities free to sell for many insurers should be paid less than agents tied to one. Khaitan & Co points out that the lower cap follows eligibility for open architecture, not actual use. A bank with one partner insurer gets the same caps as a bank with nine, even though IRDAI's own analysis found single tie-ups paid out an average 13% of new business premium against 33% for multiple tie-ups. Banks with a group insurer are likely to raise this in their comments.

What changes inside the branch?

The caps get the headlines. The conduct rules will change daily sales routines more:

• No volume-linked staff incentives. Rewards for bank and NBFC staff tied to insurance volume would be prohibited.
• No compulsory bundling. Lenders could not make insurance a condition of a loan. Where a package is allowed, the premium must be paid separately and not out of the loan amount.
• Documented suitability. Needs analysis would be required above a ticket size, with reasons recorded when a customer departs from the recommendation. This puts mis-selling controls on the record.
• Seller-level records. Each policy would carry the seller's functional identity, and mis-selling incidents would go into the public domain through a Public Insurance Registry.

Taken together, a branch manager can no longer push insurance through target-linked contests. The economics move toward fewer, better-fitted sales that stay on the books.

What should banks, NBFCs and their insurers do now?

A working checklist for the next 60 days:

1. Model your FY2025 and FY2026 insurance income under the proposed caps, product by product, including credit-linked cover.
2. List every payment to the partner that sits outside "commission" today (marketing support, branding, staff contests, trips). Under the draft all of it counts.
3. Check whether you would choose open architecture, and what a single tie-up would earn under the same caps.
4. Review distribution agreements for exclusivity, volume commitments and change-in-law clauses.
5. Map which loan products carry insurance today and how the premium is paid.
6. Prepare a suitability workflow that records the needs analysis and the customer's choice at the point of sale.
7. Pull your persistency by branch and product. The draft adds a renewal escalator of 0.5% of premium every three years from the sixth policy year, capped at 7%, so books that stay in force earn more over time.

What to watch next

Watch three things. First, the comments IRDAI receives by 25 October, including from the RBI, which Business Standard reported on 7 October would firm up its views on the proposals. Second, the draft regulations, which must be published for comment and will show which caps survive. Third, the order of rollout: the caps and the expense glide path could start before Bima Sugam and the Public Insurance Registry are fully working, which would leave banks with lower pay but without the shared infrastructure meant to cut their costs.