Buying motor insurance is often treated as a routine step when purchasing a new vehicle. Yet the commissions embedded in many of these policies have drawn sharp scrutiny from the Insurance Regulatory and Development Authority of India. In a recent consultation paper on the economics of insurance distribution, the regulator has highlighted motor insurance as a clear example of how limited transparency and multi-layered selling arrangements can drive up costs on products that frequently require relatively little effort to sell. The proposals aim to recalibrate incentives, expand customer choice and encourage more efficient distribution channels.
The Scale of Commissions in Motor Insurance
According to the regulator’s analysis, the average commission rate on motor insurance stands at around 24 per cent, with actual rates ranging from 13 per cent to as high as 50 per cent in some cases. Original Equipment Manufacturer-linked brokers and Motor Insurance Service Providers together account for a substantial share of the market—approximately 30 per cent of premiums. In one recent financial year these channels generated premiums of about Rs 29,000 crore and received nearly Rs 7,050 crore in commissions.
What has particularly concerned the regulator is the disparity in growth rates. Between FY23 and FY25, motor insurance premiums rose by roughly 34 per cent, while commissions in the same segment climbed by 259 per cent. This pattern of distribution costs outpacing underlying business growth is not unique to motor insurance, but the combination of mandatory third-party cover, relatively standardised products and powerful dealer networks makes the segment especially visible.
Why Commissions Have Climbed So High
Several structural features help explain the elevated payouts. Third-party motor insurance is compulsory, which creates a captive volume of business. Comprehensive policies that add own-damage cover are frequently sold at the point of vehicle purchase, where the dealer or an associated intermediary holds significant influence over the customer’s choice. In many cases the insurance transaction is bundled into the overall vehicle-buying experience, reducing the need for extensive product explanation or suitability assessment.
Multi-layered distribution arrangements further inflate costs. When several intermediaries or service providers sit between the insurer and the policyholder, each layer expects remuneration. Performance-linked incentives from vehicle manufacturers or dealers can add another layer of payment that is not always transparent to the end customer. The regulator has noted that such arrangements can sometimes discourage insurers from offering more competitive pricing through alternative channels, ultimately limiting choice and keeping premiums higher than they might otherwise be.
Because a portion of the product is mandatory and pricing for third-party cover is regulated, the usual market pressure that might compress distribution costs is weaker. The result is a system in which high commissions persist even though the sales effort for many policies remains modest.
What IRDAI Is Proposing
In its consultation paper titled “Recalibrating Economics of Insurance Distribution,” the regulator has floated a series of measures specifically relevant to motor insurance. One key proposal is to set much lower commission ceilings for simple and mandatory products. For new-vehicle third-party insurance, the suggested commission for distribution entities is nil, with only limited allowances for agents or associates. Own-damage, personal accident and related covers on new vehicles would also face significantly tighter caps than current market practices.
The paper encourages greater use of digital distribution platforms so that customers can purchase motor insurance directly or through regulated market infrastructure institutions without necessarily going through a dealer-linked intermediary. It also seeks to protect customer choice: dealers and workshops should not be able to deny cashless claim services simply because the policy was bought through a different channel. Certain incentive arrangements between vehicle manufacturers, dealers and insurance distributors that could work against policyholder interests are proposed for restriction.
Broader reforms under discussion include reintroducing product-wise commission caps across insurance lines, tightening overall expenses-of-management limits for insurers, and improving public disclosure of distribution costs by larger entities. The overarching goal is to align remuneration more closely with the complexity and effort involved in selling and servicing different products, while reducing the scope for costs that do not deliver clear value to customers.
Potential Impact on Customers and the Market
For policyholders, the most direct hoped-for benefit is greater affordability and transparency. Because commissions form part of the premium, lower distribution costs create room for insurers to reduce prices or improve benefits, although there is no automatic guarantee that every rupee saved will be passed on. In the case of regulated third-party premiums, the effect on the price paid by the customer may be limited; the larger shift could appear in the own-damage portion or in the competitiveness of alternative purchase channels.
Increased digital options and rules protecting claim servicing regardless of purchase channel should give buyers more genuine choice. Customers who prefer to buy online or through an independent intermediary would face fewer practical disadvantages when it comes to repairs and claims. Greater visibility into distribution economics may also help customers understand what they are paying for beyond pure risk cover.
For dealers, brokers and other intermediaries, the proposals imply a significant adjustment. Revenue models built on high motor commissions would need to adapt. Some may shift emphasis toward value-added services, longer-term customer relationships or products that genuinely require more advisory effort. Insurers, meanwhile, would need to rebalance their distribution mixes and cost structures to remain competitive under tighter overall expense limits.
Balancing Efficiency and Access
Any reform of distribution economics must navigate a careful balance. Excessively high commissions raise the cost of insurance and can distort selling practices. At the same time, a viable distribution network is necessary to reach customers, especially in smaller towns and for vehicle categories where advice or assistance still matters. The regulator’s differentiation between simple mandatory covers and more complex products attempts to recognise this distinction.
The consultation process allows insurers, intermediaries, consumer groups and other stakeholders to submit feedback before any final regulations are framed. Implementation details—exact cap levels, transition timelines, treatment of existing arrangements and monitoring mechanisms—will determine how smoothly the shift occurs and how effectively the intended benefits reach policyholders.
A Shift Toward Greater Transparency
The attention on motor insurance commissions reflects a wider regulatory effort to make the cost of distributing insurance more rational and transparent. When customers buy a policy, they are often unaware of how much of the premium is absorbed by distribution layers. By spotlighting the gap between the simplicity of many motor products and the size of the commissions attached to them, the regulator is signalling that this opacity is no longer acceptable.
If the proposed direction is finalised and effectively implemented, the way motor insurance is sold and priced could change meaningfully. Dealers may still play an important role, but they would operate within tighter remuneration boundaries and alongside stronger digital and independent alternatives. Customers would gain clearer choices and, potentially, more competitive offerings. The ultimate test will be whether lower distribution costs translate into better value for the millions of vehicle owners who must buy insurance every year.
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