By GMICapitals.com 
Introduction
IRDAI Unveils a significant move that could reshape the landscape of insurance distribution in India, the Insurance Regulatory and Development Authority of India (IRDAI) has proposed a shift from the current commission-based bancassurance model to a market-determined transaction fee model. This proposal, submitted to the Ministry of Finance, is aimed at promoting transparency, customer protection, and greater insurance penetration in the country.
What is the Bancassurance Model ?
The bancassurance model refers to the partnership between banks and insurance companies, where banks leverage their extensive customer base and branch infrastructure to sell insurance products. In return, banks earn a commission from the insurance companies on every policy sold. This model has been a dominant channel for life insurance distribution in India, contributing significantly to the business volumes of several insurers.
The Proposed Transaction Fee-Based Model
Under the proposed framework, banks would no longer earn commissions from insurance companies. Instead, they would collect a transaction fee directly from policyholders for facilitating the insurance sale and remit the premium to the insurer. Importantly, this transaction fee would not be capped or fixed by regulation—it would be determined by market dynamics, allowing banks to price the fee competitively.
For example, under the current system, a policy with an annual premium of ₹1,000 involves an 18% commission (₹180) to the bank, making the total cost to the customer ₹1,180. In the new model, commissions would be eliminated, and banks would instead charge a transaction fee separately, ideally making the cost structure more transparent for consumers.
Rationale Behind the Shift
The IRDAI’s move is a response to growing concerns about mis-selling and forced selling of insurance products by banks. Over the past few years, the regulator and the Ministry of Finance have received numerous complaints from customers who were either unaware of purchasing insurance or were sold unsuitable policies.
To address these issues, the IRDAI had established a task force in 2023 to study the efficacy and fairness of the current bancassurance model. One of the key findings was that asymmetric incentives—high commissions for some products—were encouraging banks to push prod ucts that may not be in the best interest of consumers.
Multiple Insurer Partnerships to Enhance Choice
Another major feature of the proposed model is the elimination of exclusive partnerships between banks and insurance companies. Currently, many banks work predominantly with one affiliated insurer. For instance, SBI Life, backed by State Bank of India, receives about 60% of its business through bancassurance. Similarly, HDFC Life and ICICI Prudential Life Insurance receive 65% and 29% of their business from their respective parent banks.
Under the new model, banks would be free to partner with multiple insurers. This is expected to increase competition, offer customers a wider array of insurance products, and help reduce the bias of banks promoting only their affiliate’s policies.
Benefits of the Proposed Model
- Enhanced Consumer Protection
By eliminating commissions and allowing customers to clearly see the transaction fees they are paying, the new model improves transparency. Customers would also benefit from having access to multiple insurance products, reducing the risk of being coerced into buying a single provider’s plan.
- Market-Driven Pricing
Without regulatory ceilings or floors on the transaction fee, the pricing will be left to market forces. This could lead to more competitive fee structures, benefiting both consumers and efficient market players.
- Reduced Conflicts of Interest
A flat transaction fee structure could minimize the incentive for banks to push certain products for higher commissions. This may align the sales process more closely with the customer’s needs rather than the seller’s incentives.
- Insurance Sector Diversification
Insurance companies may reduce their dependence on parent banks or exclusive partnerships, leading to a more competitive and diversified insurance market. This could also help new insurers find better distribution channels and reach underserved areas.
IRDAI’s Vision – “Insurance for All” by 2047
This reform is part of IRDAI’s broader vision of achieving “Insurance for All” by 2047—a goal that emphasizes widespread insurance coverage, product innovation, and robust distribution channels. The regulator aims to make insurance accessible and affordable while ensuring the industry operates with high standards of ethics and consumer service.
Debasish Panda, who served as IRDAI Chairman until March 2025, was a vocal critic of unethical sales practices in the insurance industry. Under his leadership, the regulator emphasized the importance of restoring public trust and positioning insurance as a transparent, low-cost product that genuinely meets the financial protection needs of Indian citizens.
A Potential Game-Changer
If approved by the Ministry of Finance, this shift in the bancassurance model could mark a turning point for the Indian insurance sector. By aligning incentives, promoting transparency, and enhancing consumer choice, the proposed transaction fee model has the potential to significantly boost insurance penetration and improve customer experience.
As the industry awaits the government’s decision on the proposal, stakeholders—including banks, insurers, and consumers—are watching closely. The success of this transition will depend on careful implementation, industry cooperation, and continued regulatory oversight to ensure the intended outcomes are achieved.
GetMyIndia.com RaysVeda.com GetMyStartup.com LawCanal.com ABHAYRAY.COM ZinCob.com