IRDAI Overhauls Bancassurance Commission Structure

Introduction

Bancassurance in India has long been a cornerstone of the insurance distribution sector. Leveraging the vast reach and trusted infrastructure of banks, insurance companies have expanded their footprint into semi-urban and rural areas of India, where standalone insurance branches are often absent. Through this model, banks act as corporate agents, selling insurance products to their customers and earning a commission for every policy sold.

However, this commission-driven model is now under scrutiny.

In a recent proposal, the Insurance Regulatory and Development Authority of India (IRDAI) has suggested an overhaul of the traditional bancassurance framework, shifting from a commission-based system to a fee-based transaction model. The change is not just regulatory, but it fundamentally alters the way commissions are structured within the system. And wherever commissions are involved, the downstream impact deserves close analysis.

What is Changing and Why?

The Current Commission Model

In the existing bancassurance setup, banks act as corporate agents for insurance companies, earning commissions on the policies they sell. These commissions, typically a percentage of the premium, act as financial incentives for the banks. However, this model has some inherent flaws. Since commissions are paid directly by insurers, banks often lean toward selling products with higher premiums. And that can mean the customer’s actual needs take a back seat, leading to questions around trust and whether the product is really the right fit.

Let’s have a look at the loopholes in the current framework:

1) Incentive Bias

The current model motivates banks to prioritize insurance products with higher commissions, regardless of whether they align with customer needs. As a result, banks push specific policies not because they’re the best fit for the customer, but because they offer higher payouts to them. This creates a conflict between generating revenue and maintaining ethical sales practices.

2) Exclusive Partnerships

Many banks enter into exclusive agreements with a limited number of insurance providers. While this simplifies operations, it significantly narrows the range of products customers can choose from. Customers may never even see better-suited plans simply because their bank doesn’t partner with that particular insurer.

3) Mis-selling

The combination of high commissions and limited insurer options has led to cases where bank employees pressure customers into purchasing unsuitable policies. These mis-selling practices damage trust and often leave customers with products that don’t match their needs, or worse, with financial liabilities they don’t fully understand.

The Proposed Transaction Fee Model

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a significant overhaul of the bancassurance model, replacing traditional commissions with a transaction fee structure. The move aims to enhance transparency, prevent mis-selling, and provide customers with more choice.

The key highlights include:

1) No Commission from Insurers

Under the proposed model, banks will no longer earn commissions from insurance companies. Instead, they’ll charge a transparent transaction fee to the policyholder. This shift decouples banks from insurer-driven financial incentives, reducing the pressure to sell high-commission products and encouraging more objective, needs-based recommendations.

2) Multiple Insurer Partnerships

Banks will be allowed to collaborate with multiple insurance providers, rather than being tied to just one or two. This provides customers with access to a broader range of products from various insurers, enabling them to compare options and select the one that best suits their needs. It also encourages innovation by promoting open competition among insurers.

3) Market-Driven Fees

Market dynamics will determine the transaction fee charged by banks; there is no regulatory minimum or maximum. This opens the door for healthy competition among banks, prompting them to offer better service and justify their fees. Ultimately, it benefits customers with more value-driven and transparent interactions during the insurance sales process.

Impact on Commission within the Bancassurance Channel

For Banks

The shift away from insurer-paid commissions alters how banks generate revenue, causing them to reassess their profit margins from insurance distribution. They’ll need to justify transaction fees directly to customers, likely by offering better service and a broader range of product options. Competitive edge may come from customer experience and pricing transparency rather than backend commissions.

For Insurance Companies

Without the leverage of commission-based relationships, insurers will have to focus on making products attractive on their own merits. This includes competitive pricing, flexible features, and better customer service. They’ll also need to educate bank staff effectively, since they can no longer rely on commissions to push their offerings over others.

For Customers

Customers stand to benefit the most from this model. With clearer visibility into fees and broader access to products, they can make informed decisions. This may also reduce pressure from mis-selling, as banks would no longer favor high-commission products. However, customers will need to understand and accept the new transactional fee structures.

Potential Challenges and Considerations

As the IRDAI pushes for a more transparent and customer-friendly insurance ecosystem, the shift from a commission-based to a transaction fee model in bancassurance is a bold step. But like any major change, it brings along a set of challenges that stakeholders must carefully consider:

1. Implementation Hurdles

a) Redefining Bank-Insurer Agreements

Moving away from traditional commission structures will require a complete overhaul of existing agreements between banks and insurers. Revenue-sharing models, performance metrics, and payout structures will need to be realigned to reflect transaction fees rather than sales volumes. This shift may involve lengthy negotiations and regulatory approvals.

b) Operational Adjustments

Banks will need to modify internal processes and IT systems to accommodate the new transaction fee framework. This includes integrating real-time fee tracking, updating billing mechanisms, and ensuring seamless reporting for compliance and auditing purposes.

c) Training and Compliance

Frontline banking staff, who previously earned commissions for selling policies, will need to adapt to a new commission structure. Comprehensive training programs will be required to help them understand the revised model, focus on customer needs, and ensure adherence to compliance standards. There’s also the need to rebuild motivation in the absence of direct sales-linked earnings.

2. Market Response

a) Resistance from Stakeholders

Both banks and insurers may be reluctant to adopt changes that could impact their revenue streams. With commissions no longer driving product push, insurers may see a decline in volumes unless the model is thoughtfully restructured to offer mutual value.

b) Price-Based Competition Among Banks

With transaction fees now transparent, banks may begin to compete on cost, offering lower transaction fees to attract customers. This price war could reduce margins and force banks to rethink how they deliver value beyond just pricing.

c) Customer Perception and Acceptance

Acceptance may be higher in regions where alternative insurance channels are limited or where the combined premium plus transaction fee is still lower than other market options. However, this dynamic introduces a new challenge: channel conflict. Insurance companies will need to carefully manage their multiple distribution channels to avoid pricing discrepancies that could confuse or alienate customers.

How Technology Can Help in Managing This Change?

As the bancassurance model undergoes a fundamental shift, commission structures must evolve alongside it. Traditional, opaque commission-based systems are giving way to models that prioritize fairness, performance, and customer value. Managing these dynamic changes manually is not only inefficient but also unsustainable.

That’s where Incentivate comes in.

Our sales commission software is purpose-built to help banks and insurance providers manage this transformation with confidence and clarity. Here's how:

Redesign payout models: Incentivate supports modern, flexible structures, whether it’s transaction-based fees, hybrid payout models, or performance-linked incentives.

Track complex incentives in real-time: Our platform offers a unified view for managing, monitoring, and optimizing commissions across the entire organization.

Ensure compliance and governance: Incentivate ensures that your commission processes stay fully aligned with evolving norms and internal governance policies, minimizing risk and ensuring audit readiness.

Drive transparency and trust: From front-line sales teams to senior management, everyone benefits from clear, accurate, and timely insights into incentive performance.

Conclusion

IRDAI’s proposal to shift from commissions to transaction fees marks a move toward a more transparent and customer-focused bancassurance model. By reducing the emphasis on product-pushing, it aims to minimize mis-selling and enhance trust.

The shift also supports IRDAI’s broader vision of “Insurance for All” by 2047, helping boost insurance penetration across the country. That said, making this shift work smoothly may require re-examining some of the existing rules governing how banks and insurers partner with each other.