IRDAI proposes sharp caps on credit-linked insurance commissions paid to NBFCs

Key facts

• The Insurance Regulatory and Development Authority of India (IRDAI) has proposed capping commissions on credit-linked life insurance at 2% for single-premium products and 2.5% in the first year for multi-year products, against current payouts of up to 57%.
• Insurance commissions accounted for 3-25% of profit before tax for select NBFCs in FY2026, with lenders heavily exposed to credit-protection products facing the sharpest impact, according to Kotak Institutional Equities.
• First-year commissions to NBFCs across insurance products averaged 42-67%, while commissions on credit-protect single-premium products ranged from 22% on average to as high as 57%.
• The NBFC channel's life insurance premium nearly tripled from Rs36 billion in FY2023 to Rs103 billion in FY2025, with about 93% of this business being single-premium group credit life and commissions on group credit life rising from 5% to 28%.
• The proposal prohibits compulsory bundling of insurance with loans; lenders taking portfolio insurance must bear the premium themselves, and borrowers must be informed of interest rates with and without insurance, be free to choose the insurer, and pay the insurance premium separately.
• Commissions would become all-inclusive, covering incentives, awards, selling expense reimbursements, brand-value payments and non-cash benefits, while volume-linked and reward-linked incentives for bank and NBFC staff selling insurance would be prohibited.
• Life insurers' expenses of management would be capped at 15% within two years and 12.5% within five years, while general insurers' limit would fall to 25% within two years and 20% within five years.
• Cost audits would become mandatory for insurers and distribution entities with insurance revenue above Rs1 billion, and entities above Rs500 million would have to publish revenue, expenses, related-party payments and profit after tax.
• The framework would consolidate 17 existing categories of insurance distribution into three broad categories, reduce entry capital for distribution entities to Rs1 million from the current Rs5 million-Rs50 million range, and make registration permanent instead of renewal every three years.
• Distribution entities would get open architecture with no limit on the number of insurers, compared with the current nine-insurer cap for banks, and would be permitted to sell non-insurance products.
• The proposal removes the Rs50 million risk-cover limit for MSME lending, while complimentary group term insurance for depositors and borrowers and cards with embedded insurance would remain permissible subject to conditions.