What IRDAI's Distribution Reforms Mean For Bank Fee Income

A bank sells a ₹1 lakh life insurance policy. On average, it earns ₹27,000 in first-year commission. Under IRDAI's draft proposals, that same policy—if it has a premium payment term of 10 years or more—would earn the bank ₹20,000. For single-premium credit-linked life insurance, the commission can fall from as high as ₹57,000 to ₹2,000. For multi-year credit-linked life, the first-year cap is ₹2,500.

On September 23, the Insurance Regulatory and Development Authority of India released a consultation paper titled "Recalibrating Economics of Insurance Distribution," proposing hard caps on insurance commissions across life, health, motor, and credit-linked products. Banks, which distribute insurance as corporate agents, are squarely in the line of fire.

The draft seeks to reduce the cost of insurance distribution, which IRDAI believes has inflated policyholder costs without improving outcomes. Banks are proposed to be categorised under the framework as Insurance Distribution Entities, a classification that subjects them to tighter caps than individual agents.

The Revenue at Stake

Most banks do not separately disclose how much they earn from insurance distribution. It gets bundled into "other income" or "fee and commission income." But the commission rates they earn are available from regulatory data.

According to Kotak Institutional Equities, based on IRDAI data for FY2025, banks as corporate agents earned an average first-year commission of 27% on life insurance policies, with a maximum of 62%. On total premium, the average was 10%, with a maximum of 40%. The range of average commission across insurers was 3% to 37%.

In general insurance, banks earned an average commission of 26%, with a maximum of 82%. The range of average commission was 13% to 94%.

These are commission rates expressed as a percentage of premium, not absolute income. A bank that sells a ₹1 lakh life insurance policy with a 27% first-year commission earns ₹27,000. Multiply that across thousands of policies, and the numbers add up. Within bancassurance, single tie-up arrangements carried an average total payout of 13% of new business premium against 33% for multiple tie-up arrangements, according to IRDAI. Private life insurers routed an average 31% of total commissions to related parties, reaching as high as 95% in some cases.

Why Banks Are In The Crosshairs

Banks distribute insurance as corporate agents, proposed to be categorised under the framework as Insurance Distribution Entities.

Under the current framework, banks as corporate agents were limited to nine life, nine general, and nine health insurers. The proposed framework allows all IDEs to adopt open architecture with no limit on the number of insurers, though this is an option, not an obligation. That sounds like more freedom. But it comes with tighter commission caps.

Nomura notes that the proposed commission caps for IDEs are stricter than for individual agents. Within life insurance, there is "leniency with agents vs all other distributors." This means banks, as IDEs, face tighter limits than tied agents.

Kotak Institutional Equities says the reform's impact is "skewed," with institutional distributors such as banks and large digital platforms taking higher cuts than retail or individual distributors.

IRDAI's rationale is data-driven. Private life total expense ratio fell from 21.3% in FY2015 to 16.5% in FY2021 and is back to 20.2% in FY2026. Private general went from 30.3% to 25.1% in FY2019 and then to 32.1%, above its pre-2016 level. Corporate agents' new business premium rose 1.3x from ₹630bn to ₹800bn over FY2023-25 while remuneration rose 2.3x from ₹96bn to ₹216bn. Broker-led general insurance premium rose 1.4x while commission rose 2.7x. Life persistency at the 61st month was 48.4% against 71% for policies sourced online. General insurance grievances rose from 78,347 in FY2023 to 137,361 in FY2025.

What's Changing

The IRDAI draft proposes significant reductions across product categories.

In health insurance, individual first-time commissions for IDEs are capped at 15%, against 20% for agents. Renewal commissions drop to 5% for IDEs, against 10% for agents. Group health commissions are capped at 2.5% subject to a maximum of ₹10 million, against an FY2025 average of 15% and a maximum of 93%.

In credit-linked life insurance, the cut is steepest. Single premium products are capped at 2%. Multi-year products are capped at 2.5% in the first year and 1% on renewal. Against an FY2025 credit life single premium average of 22% and a maximum of 57%, this is a dramatic reduction. The draft also prohibits compulsory bundling of insurance with loans; a lender wanting portfolio cover must take a group policy and bear the premium itself.

In motor insurance, new vehicle third-party commissions are proposed to be nil for IDEs. Own damage commissions are capped at 5%. Against an FY2025 average of 26% for new vehicle third-party motor cover, this is a significant hit.

In life insurance, for individual non-linked and linked products with a premium payment term of 10 years and above, IDEs face a cap of 20% in the first year and 3% on renewal. The FY2025 average first-year commission for banks was 27%.

The reform also tightens the definition of commission. It now includes all forms of remuneration—direct or indirect, monetary or non-monetary—including incentives, awards, reimbursement of selling expenses, brand value payments to related parties of distributors, and non-cash benefits. Volume-linked and reward-linked incentives for bank and NBFC staff selling insurance are prohibited.

Separately, the draft proposes expense of management (EOM) caps with a five-year glide path. General insurers and standalone health insurers must bring EOM down to 25% in two years and 20% in five. Life insurers must achieve 15% of premium in two years and 12.5% in five; those already below this limit must go below 10%. The definition of EOM is also tightened: the denominator moves to gross direct premium, inward reinsurance benefit is removed, and carve-outs for technology, insurance awareness, and rural and government scheme spending are folded into the single limit. Reinsurance commission cannot be netted off.

The draft also disintermediates money flow. Premium must move directly from the customer's own account to the insurer; third-party payments are not permitted. Reinsurance funds bypass broker accounts. Commission is payable not later than the day after the end of the free-look period, with delay attracting interest charged to operating expenses.

For banks with rural reach, there is an additional commission allowance: for towns and cities below 1 million up to 50,000 population, 10% of the applicable commission limit on first-year premium; for towns and cities below 50,000 and all rural areas, 20%.

The draft also introduces enforcement teeth. Cost audit becomes mandatory for every insurer and for distribution entities with insurance revenue above ₹1 billion. Entities above ₹500 million must publish revenue, expenses, related-party payments, and PAT. Non-convergence invites restrictions on new product launches, dividend distribution, and new business through the channel responsible. The regulatory fee falls from 0.05% to 0.04% of premium, capped at ₹200 million.

Mis-selling acquires a financial consequence. Documented needs and suitability analysis becomes mandatory for sales by life insurers above a defined ticket size, and customer consent does not absolve responsibility for an unsuitable sale. Twelve illustrations are codified, including non-par sold in lieu of bank deposits and ULIPs to risk-averse or post-working-age customers. Mis-selling triggers commission claw-back, with each policy tagged to the selling person's functional identity.

Transparency also shifts. Dark patterns are prohibited, and access to product features, pricing, and claims performance must not require customers to surrender personal details. One-page information sheets are to be developed by the Councils. Commission policies must be published within one click of the landing page, and commission stated on policies with cover above ₹500 million.

The draft also simplifies the distribution architecture, collapsing 17 categories into three: Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs), and Market Infrastructure Institutions (MIIs). IDPs remain under closed architecture, meaning an individual agent can represent only one life, one general, and one health insurer. IDEs have the option, but not the obligation, to adopt open architecture.

For motor distribution, MIPS must register as distribution entities or become point of sale persons or single-insurer associates. Dealers must display the MII purchase option with QR code, share the customer mobile number with the Public Insurance Registry for VAHAN validation, and may not deny cashless repair for policies bought elsewhere. OEM incentive plans rewarding insurance sales are prohibited.

The Offset Playbook

Will bank fee income collapse? Not necessarily. Analysts and company managements point to several offsets.

Motilal Oswal's Niva Bupa note says management believes the new rates "remain profitable for banks given near-zero variable cost." Lower commissions do not mean banks lose money on distribution; they simply earn less per policy. The marginal cost of selling an additional insurance policy through an existing bank branch is minimal.

Niva Bupa's management cited the GST ITC precedent: after the GST input tax credit loss, monthly retail business from banks doubled in 12 months. They expect a similar volume response now. The logic is straightforward; lower commissions allow insurers to reduce prices or slow price increases, which makes products more attractive to customers, which drives more volume.

According to Niva Bupa management, commission rates in PSU banks were not a driver of business. Lower rates give banks room to invest in relationships rather than chase commissions.

The IRDAI draft also allows IDEs, including banks, to sell non-insurance financial products subject to approval from the relevant regulator. This is an explicit offset mechanism to reduce dependence on insurance commissions. Nomura notes that insurance distributors "have been given a relief by allowing them to sell non-insurance financial products as well."

Kotak notes that NBFCs are the worst hit. Insurance commissions were 3% to 25% of PBT for select NBFCs in FY2026. Credit-protect single-premium commissions were 22% to 57%. First-year commissions to NBFCs averaged 42% to 67%.

Niva Bupa's management called the banca channel "positive on growth and economics, despite a sharper cut." For insurers, banks remain a critical channel. They are likely to work with banks to maintain volumes.

What About the Broader Fee Income Picture?

For banks, insurance distribution is one part of a larger fee income pool that includes mutual funds, wealth management, cards, and payments. The insurance hit will be felt, but it may not be existential.

The key variable is volume. If banks can sell more policies at lower commissions, total income may hold up. If they cannot, fee income will take a hit.

Nomura notes that SBI Life, which relies heavily on its parent bank SBI, is "best placed" among insurers because its current expense of management ratio is already low. Separately, SBI as a bank will face the same proposed IDE caps; the net fee-income impact depends on volume growth.

What Happens Next?

The consultation paper is a draft with 32 consultation questions. Comments close on October 25. Final regulations are expected later, with implementation likely from FY2028.

Industry feedback may soften some of the caps. Kotak notes that "these are consultation proposals, not final regulations." The final rules could be less stringent.

The draft also proposes new distribution infrastructure. Bima Sugam India Federation is the first Market Infrastructure Institution (MII), a not-for-profit company floated by insurers with a capital requirement of ₹250 million. MIIs are meant to create a level playing field and make the system cheaper and more transparent. The platform fee is capped at 5% of premium for motor. A Public Insurance Registry will enable Know Your Insurer and Know Your Distributor, portability, and functional identity of distribution persons.

For banks, the immediate task is to model the impact on their insurance distribution income and prepare for lower commissions. Some banks may push for higher volumes; others may shift focus to non-insurance products.