Squeezed: LIC agents and IRDAI's new commission cap proposal

When Natraj (name changed), a Chennai-based LIC agent with over 30 years in the field, looks at his recent business, he sees little that is new.

“All my recent fresh business comes from mutual funds and RBI bonds. I hardly get any new life insurance business,” he said, sharing a quick recap of his client acquisitions in the past 8-10 months.

Some companies offer deposit schemes and he handles that business too, but the commission is Rs 300-500 per deposit. “That barely covers my fuel and phone expenses,” he told The Federal.

News of extensive job cuts, particularly in the tech industry, has made young professionals wary of long-term premium commitments, he said. Further, apps and platforms such as Bima Sugam and Policybazaar let customers buy policies directly, leaving out an entire section of the insurance value chain — agents.

When a claim is raised, “it always helps to have an agent assisting you,” but people don’t realise that, he rued.

What IRDAI proposes

The latest move of the Insurance Regulatory and Development Authority of India (IRDAI) has multiplied Natraj’s worries. On September 23, the insurance regulator released a consultation paper titled Recalibrating Economics of Insurance Distribution.

It proposes product- and channel-specific commission ceilings, a phased cut in life insurers’ expenses of management (EoM) to 12.5% of premium within five years, more transparency, and measures against mis-selling.

The table below indicates just a portion of the proposals, limiting first-year commissions (FYC) for agents. Across brackets, there is a substantial fall in how much an agent is going to earn on the sale of a policy. (An FYC is the compensation paid to an insurance agent, broker, or financial advisor from the first year's premium collected on a newly issued policy. It's typically much higher than renewal rates because it rewards the agent for the initial effort of prospecting, pitching, and closing the sale.)

Comments were invited until October 25, and the deadline was extended to October 31. The new norms are expected to kick off in early 2027.

Loss of income

While the proposals will have an impact on the agents of all life insurers — private and Life Insurance Corporation — LIC agents are particularly a worried lot. The insurance behemoth has over 15 lakh active agents across India, who earn no salaries and have built their careers over decades entirely around commissions.

K Nitya Kalyani, a Chennai-based business journalist and writer focused on insurance, pointed out that for most individual agents, commission represents livelihood. “They don't receive a regular salary. They spend time and money finding customers, explaining products, completing paperwork and providing service. Not every prospect becomes a sale,” she told The Federal.

“Upfront commission helps compensate for that effort and expense. Lower commissions, or a change in when they are paid, could affect their earnings and cash flow, especially for agents who are still building their business,” she added.

Nitya Kalyani pointed to the uncertainty around how the insurers will respond to the proposed changes. “Will they change sales targets, product priorities or incentive arrangements? Agents have to plan their business without yet knowing how the final rules will work,” she said.

Eating into commissions

“Lakhs of families live only on commissions,” concurred K Damodaran, National Treasurer of the LIC Agents’ Organisation of India (LICAOI), a major national trade union affiliated with the Centre of Indian Trade Unions (CITU). The fear is sharpest around FYC, which compensates agents for months of prospecting, travel and paperwork, much of it unpaid, Damodaran told The Federal.

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It’s not just about the commissions — several other proposals worry agents. These include public disclosure of individual agents’ payouts, recovery of commissions in alleged mis-selling cases, and a higher minimum qualification, from Class 10 to Class 12. The last could push out 30-40% of the agent force, said Damodaran.

“From Kanyakumari to Kashmir, 90% of LIC policies are in villages,” he added. “Cities have internet and private companies, so the impact will be less there, but rural customers will suffer badly.”

The previous trim

The LICAOI notes that agents have already absorbed one cut. In a representation to IRDAI, it said an October 1, 2024 restructuring reduced first-year total commission from 35% to 28% for applicable business. It wants the impact of that change reviewed before anything further is imposed.

It also opposes clawbacks that make agents repay commission when policies lapse for reasons beyond their control, such as a customer’s job loss or illness. It wants recovery to be proportionate and evidence-based, and to distinguish verified mis-selling from plain bad luck.

Shanil TS, Thrissur divisional secretary of the LICAOI and an agent for over two decades, sees a larger design. “We see this as part of a broader attempt to gradually eliminate the role of agents in the insurance sector,” he told The Federal.

Petitions and more

The agents are making an organised pushback. Agent bodies have sent petitions to the Prime Minister’s Office, the Finance Ministry and IRDAI, and are meeting MPs from several states, asking them to raise the issue in Parliament.

They want another three to six months for reviews and comments, and face-to-face hearing for grassroots agents. The LICAOI has also asked for a comparative study of the costs, pay and service duties of individual agents, corporate agents, brokers, banks and digital platforms, arguing that agents should not face “disproportionate restrictions” without a transparent look at how other channels are treated.

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Its other demands include sustainable renewal commissions, transition safeguards, and welfare cover for agents facing illness, disability or old age.

Protests are under way, Shanil said. “The agitation will intensify in the coming weeks," he added. Agents plan to join a protest in Delhi in the first week of December.

Unions up in arms

Unions are making a wider argument, too. V Ramesh of the All India Insurance Employees Association (AIIEA) said the 2022 cap of 25% on total commission did not deliver the higher volumes that were promised. The AIIEA is the oldest and largest trade union in India's public-sector insurance space, representing workers in LIC and public-sector general insurance companies.

In a market where “people do not buy insurance on their own, lower commissions will mean fewer policies,” he pointed out. The proposals favour private players, he claimed. He cited Swiss Re’s forecast of about 6.9% annual real premium growth over 2026-2030 as a reason not to cut deep.

HM Virupakshappa, president of the Bangalore DO 2 Divisional Council for the Life Insurance Agents Federation of India, said there is hope among LIC agents that the new rules would not be applicable to them. The IRDAI paper, however, makes no such distinction between LIC and private sector insurance agents.

Grass on the other side

Are private-sector agents better off? Only partly.

Private insurers do 60-70% of their business through banks, so they depend less on individual agents. Many of their agents already work under performance-linked incentives and bonuses. But a commission cap would still hit them, and newcomers may hesitate to join.

Private companies “may not suffer much, but their individual agents will face difficulties,” a Bengaluru-based LIC agent, who also wished to remain anonymous, told The Federal.

The competition is wide. Banks cross-sell to their own customers, dealers bundle cover with vehicles, and apps let younger customers compare and buy on their phones. Unlike a salaried bank employee, an individual agent builds customers, information and infrastructure alone.

“Digital platforms make it easier for customers to compare and buy certain policies without meeting an agent. Especially the younger, digitally comfortable customers can compare premiums and features on their phones and complete a purchase without ever meeting an agent,” said Nitya Kalyani.

“The traditional agent must demonstrate value beyond simply arranging a policy. Personal advice, understanding the customer's circumstances, close networking with a friendly neighbourhood touch, helping with renewals and supporting claims can make a difference,” she added.

“Agents are expected to sell products and meet targets set by insurers. If the regulator wants more customer-focused selling, insurers must also examine how they set those targets and measure performance.”

The regulator’s case

IRDAI chairman Ajay Seth has defended the proposals, saying the aim is an orderly transition to lower costs for policyholders. He has cited cases where distributor remuneration has grown much faster than premiums since commission caps were removed in recent years.

The regulator has largely sought to address the concerns of policyholders. Nitya Kalyani noted that surrender payouts account for 37% of the value of benefits paid by life insurers, more than maturity benefits (35%) and death claims (7%). This means, surrenders make up a larger share of benefits paid than maturities or death claims, which raises questions about whether policies suit customers.

“Not every surrender signals mis-selling, and the surrender share is not strictly a persistency measure,” Nitya Kalyani told The Federal. Persistency measure (or persistency ratio) is the percentage of active life or health insurance policies that remain in force, with policyholders continuing to pay their renewal premiums over the specified period.

“But large upfront commissions can tilt advice towards what sells over what suits the customer, and products are often too complex for buyers to judge,” the journalist added. “The regulator is asking whether incentives should move from simply making sales to sustaining good customer outcomes.”

Where it may land

Nitya Kalyani expects “considerable discussion and some modifications” before final rules. The details will decide the outcome: ceilings, treatment of different channels, transition periods, and how outcomes are measured.

Yet, at a time when India is trying to increase its insurance penetration, the IRDAI proposals could become counterproductive, it is feared.

Speaking with The Federal recently, N Rangachary, the first chairman of IRDAI, pointed out that any transition should be gradual, proportionate and demonstrably linked to policyholder welfare.

Also read | ‘Policyholder, not commissions, must be at heart of IRDAI reforms’: N Rangachary

“At a time when India's insurance penetration remains disappointingly low, the industry requires greater distribution capacity, more professional advice and sustained efforts to develop insurance consciousness among the public. It would be unfortunate if reforms intended to improve affordability inadvertently reduced the availability and quality of these services,” he said in an exclusive interview.

“Mis-selling must be addressed decisively, but responsibility must be determined fairly across insurers, product design and distribution channels,” he said. “The ultimate measure of regulatory success is not how much commission has been eliminated, but how many more Indians have secured meaningful insurance protection, how fairly and promptly claims are settled, and how effectively the insurance system serves society.”

Picking up the pieces

Meanwhile, the agents continue to wonder how their livelihoods will pan out.

“There is talk of a security net for gig workers like Swiggy delivery partners and Uber drivers. What about us? We have neither job security nor pension nor employers backing us,” said Shobha (name changed), a Chennai-based LIC agent.

Shobha, who insists she’s a “homemaker first”, spends about 2-3 hours a day selling LIC products, often at informal set-ups like her children’s school gate and the neighbourhood temple. She makes a modest income with her commission. “Even while inflation is shooting up, my commissions are going to come down,” she rued.

“We make dozens of trips to the customer’s house, explaining the policy benefits. Another dozen visits to get the papers in order. Raising a claim is yet another arduous exercise. Who is listening to us?” Natraj wondered. “I’m yet to meet a GenZ kid looking to become an agent. Not surprising.”

(With inputs from Rajeev Ramachandra in Kochi, Mahalingam Ponnusamy in Chennai, and Naveen Ammembala in Bengaluru.)