MUMBAI: The insurance regulator has sought to curb distribution costs and misselling by tightening limits on commissions and other expenses, after a reform meant to give insurers greater flexibility instead resulted in a big chunk of premium income being gobbled up by distributors.The Insurance Regulatory and Development Authority of India (Irdai), in a consultation paper, has proposed reducing the segment-level cap on expenses of management (EoM) for general insurers from 30% to 20% over five years. For life insurers, the cap is proposed to fall to 10% over the same period.Irdai had replaced individual commission sub-caps with an overall, board-approved EoM limit in 2023, allowing insurers greater freedom to determine how they spent on distribution. The aim was to encourage competition and efficiency.The regulator now says the reform produced an unintended result. Insurers competed aggressively for access to intermediaries, pushing up distributor remuneration rather than passing efficiency gains to policyholders.Between FY23 and FY25, distributor remuneration grew four to five times faster than gross premium, according to Irdai. A larger share of premium income was therefore absorbed by commissions and other distribution payments making insurance less affordable and reducing returns for policyholders.Between FY23 and FY25 distributor payouts in general insurance rose 82% to Rs 24,400 crore, against 24-26% growth in premium, while first-year payouts in life insurance increased 48-52%, compared with 11-12% growth in premiums. Commission and fee income at brokers rose 60-75% over three years, while banks and corporate agents, which generated 24-28% of new business, captured 38-45% of incremental commissions after the 2023 deregulation.The regulator has also identified regulatory arbitrage among intermediary structures. Payments described as advertising, infrastructure or marketing fees, for instance, were being used to circumvent commission limits. Motor insurance illustrates the problem. Multilayered brokerage arrangements have contributed to high acquisition costs, including for mandatory motor third-party cover.Irdai also sees a link between high upfront commissions and policy churn and misselling, which can weaken policy persistency. Its proposals seek to standardise commissions according to product complexity and improve transparency in pricing and distribution payments.The proposed framework would also shift the basis for calculating EoM for general insurers from gross written premium to gross direct premium income in India, excluding inward reinsurance to avoid double-counting.The regulator’s wider objective is to reduce distribution costs while making insurance more accessible. The proposals include measures to lower entry and capital barriers for distributors.