IRDAI’s Proposed Insurance Commission Caps: Why Incentive Design Is Getting More Attention

Introduction

Insurance distribution in India is entering a period of significant change.

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed tighter controls around insurance commissions, distribution expenses, sales incentives, and accountability for mis-selling. The proposals include commission caps, restrictions on certain volume-linked incentives, salesperson-level policy identification, and clawbacks when mis-selling is established.

But the bigger question is not simply how much insurers can pay in commission.

It is what their incentive plans are actually encouraging salespeople to do.

When compensation is closely tied to a sales target, the target becomes more important than a number. It becomes a signal about what the organization values. The bigger question is how these proposals will change the way insurers reward sales performance.

What is IRDAI proposing?

IRDAI's consultation proposals seek to address concerns around distribution costs, mis-selling, customer outcomes, and the way insurance sales are incentivized. Among the proposed changes are:

a) Greater controls on insurance commissions and distribution expenses

b) Restrictions on volume-linked or reward-linked incentives for bank and NBFC employees selling insurance

c) Linking individual salespeople to the policies they sell

d) Greater transparency around distributor remuneration

e) Commission clawbacks in cases involving mis-selling

f) Greater emphasis on the quality of sales, servicing, and policy persistency

The proposals are intended to encourage a distribution model where compensation is increasingly connected to the quality and sustainability of business, rather than simply the number of policies sold.

IRDAI Chairman Ajay Seth summarized the broader objective in a simple line: “Insurance should be bought, not sold.”

Are Insurance Incentives Rewarding the Right Behaviors?

Imagine two insurance salespeople.

Both sell 100 policies.

The first generates policies that remain active, have low complaint rates, and match customer needs. The second achieves the same sales number, but a significant portion of those policies are cancelled or generate customer complaints.

If both receive essentially the same reward, the incentive plan is treating two very different outcomes as equal. That is where traditional sales compensation can fall short.

Harvard Business School's Frank Cespedes has found that approximately 70% of sales compensation plans focus primarily on top-line sales volume. His observation is important because a plan that heavily rewards volume can unintentionally communicate one message to the field: sell more.

For insurance, that may not be enough. The better question is:

Did the sale create sustainable customer and business value?

Incentive plans can create unintended behaviour

This is not unique to insurance.

Research published by Harvard Business Review found that incentive programs can produce unintended consequences when employees discover ways to maximize the reward without necessarily producing the outcome the company intended.

Timothy Gardner, professor at Utah State University and co-author of HBR's research on sales incentives, explains the underlying problem: “When you create a game, you can game the game.”

The lesson for insurance companies is straightforward.

If an incentive plan rewards new policy volume but does not sufficiently account for cancellations, persistence, customer complaints, and compliance, sales teams will naturally optimize around the metrics that affect their payout.

That does not necessarily mean salespeople are deliberately acting against the company's interests. It means the compensation system is shaping unintended behavior.

Clawbacks change the incentive equation

The proposed clawback mechanism makes this even more important.

Under a traditional commission process, the journey may look like this:

Sale → calculation → payout

A stronger governance model needs to look more like:

Sale → calculation → payout → policy performance → exception → adjustment or clawback

That difference has major operational implications.

If a policy is later cancelled or a mis-selling case is established, the organization needs to know which salesperson generated the transaction, which incentive rule applied, how much was paid, whether any exception was approved, and how the recovery should be calculated.

In other words, the incentive process can no longer end when the commission is paid.

This is where spreadsheets and disconnected workflows can become a serious limitation.

What should insurance companies measure?

The answer is not to create an incentive plan with dozens of complicated metrics. Instead, insurers should identify the few outcomes that genuinely represent a good sale.

Depending on the business model, these could include:

Sales achievement + policy persistency + customer quality + compliance + servicing

The weighting can vary by role and product.

For example, a frontline seller may still have a strong sales target, while part of the incentive is linked to policy quality or persistence. A manager’s incentive plan could include measures of team quality. Distributor payouts could also consider long-term customer service outcomes, rather than focusing only on initial sales.

The important principle is that the reward should follow the behavior the organization wants to sustain.

HBR's research on sales compensation notes that fewer than 9% of U.S. companies believe their sales compensation plans consistently drive the precise selling behavior they want.

That suggests the problem is not simply calculating incentives correctly. It is designing incentives correctly in the first place.

Where does incentive management technology fit?

For insurers, banks, NBFCs, and other financial institutions, this regulatory shift creates a need for stronger incentive governance.

An incentive management system such as Incentivate can help connect the different parts of the compensation lifecycle: rules, sales data, calculations, exceptions, approvals, adjustments, clawbacks, and audit trails.

More importantly, it gives sales and compensation teams the ability to answer questions that become increasingly important under a more outcome-focused regulatory environment:

- Why was this salesperson paid?

- Which policy generated the payout?

- Which rule was applied?

- Was an exception approved?

- Did the policy later trigger a clawback?

- Can the calculation be explained and audited?

- Can incentive rules be changed without rebuilding the entire process?

The goal is not just to automate commission calculations. It is to build a system that tracks and manages incentives clearly, while allowing changes as business goals and regulatory requirements evolve.

Conclusion

IRDAI’s proposals could change commission structures across the insurance industry. But the bigger question is how insurers choose to reward sales performance.

Instead of asking, “How much did we sell?” companies need to ask, “Did our incentives encourage the right sales behavior and customer outcomes?”

As commission caps, clawbacks, policy persistency, and mis-selling become more closely linked, insurers will need better ways to track how sales are made and what happens after a policy is sold.

The goal is not just to calculate commissions accurately. It is to make sure incentive plans reward the outcomes that matter to the business and its customers.

Incentive management should be about more than ensuring payouts are accurate.