In FY25, insurance sector collected ₹1.93 lakh cr in premium and issued 41.84 cr policies. Insurance penetration - premium as share of GDP - stood at 3.7%, unchanged from year before. Life insurance penetration slipped to 2.7% from 2.8%, while non-life penetration stayed flat at 1%. In FY26, however, ₹3.30 lakh cr of premiums were collected, reflecting growth of 12.5% in life, 12.4% in non-life, respectively. Once again, life and non-life insurance penetration stayed flat.
So, the industry was selling more while ever, while failing to drive objectives: reach, and access. Instead, industry was more successful at selling to existing customers than it was at acquiring new ones or retaining clients of recent vintage. Something had to be done. But what?
According to RBI's June 2026 Financial Stability Report, commission ratio of private life insurers doubled between FY22 and FY26, to 9.1% and rose sharply for private general insurers. This, by itself, was not an issue. The court, however, went on to state that instances of public life insurance policy withdrawals and surrenders reached 38.3% of total payouts, while benefits stood at 36.9%.
Premature withdrawals indicate customer dissatisfaction arising from poor product fit, while surrenders pointed to deferred mis-sale. This evidenced by Finance Ministry's letter from the FM to banks for misselling life insurance policies, the surrender of which impacts reinvestment in government securities and infrastructure bonds, forced the regulator, IRDAI, to act.
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Thus, on Sept 23, IRDAl's consultation paper, 'Recalibrating Economics of Insurance Distribution', proposed to reintroduce product-wise commission caps (something it had removed in 2023 to aid greater penetration) to reduce misselling. But this is tantamour to addressing symptom, while ignoring cause.
Unsurprisingly, market's reaction was visceral. Share prices of PB Fintech and Turtle mint fell 36% and 20%, respectively, while insurance brokerage firms trimmed earnings estimates by 12%.
Of course, benefits of reduced misselling - a more affordable, transparent and customer-centric market - need no justification. IRDAl's action has taken cognisance of one specific industry malpractice to restrict future incidences: bundling of insurance products with loans by bank personnel, who need to meet liability-product income targets at any cost.
But bancassurance - partnership between bank and insurance company - while significant, is not only distribution line to be affected. And it's in the inflexible, one-size-fits-all nature of insurance policy in which smaller companies may be disadvantaged and brokerages that see up to 1 mn jobs lost by 2030 - that discussion paper aims its sights at remuneration tied to policy sale - and its continuation, it's likely to target worst offenders, while leaving core mechanisms of this sharp practice intact for 3 reasons:
The cap reduces incentive but not intent, by rewarding a lower volume of sales with a smaller incentive. Any IRDAI regulation to attack the problem, rather than the issue itself, is likely to migrate the object of cap - from a capped one to a less-capped one, from unit margin to cumulative volume, even replacing commissions with fees to make up earning deficit.
Any such action will only affect direction of future policies, not salvage millions of policies already sold and surrendered that constitute breach of trust as much as poor business practice.
When Australia faced similar issue, it simultaneously introduced commission ceilings with clawbacks. If policy was surrendered in first 2 years, almost entire commission had to be returned. By redirecting incentive to persistency and penalising early lapsing, Australia ensured that customer was sold an appropriate product.
A progressive commission cap, along with performance refunds, is something Indian regulator should consider along with introduction of 3 other measures:
Name and shame with teeth like those of RBI and Sebi, insurance ombudsman should use its grievance portal, Bima Bharosa, to publish list insurers and distributors that consistently reject claims, so customers can make informed decisions. Furthermore, being listed should carry a commercial penalty commensurate with violation.
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Training before selling: Misselling often occurs on account of incompetence, rather than malicious intent. Mandatory and rigorous annual training and certification should ensure accountability traceability and long-term compliance.
Track the trail: Tracking continuous, data-driven supervision can provide early warning triggers and actionable insights to reduce misselling and lapse rates.
Ultimately pushing a distribution commission reform as panacea for misselling and under-penetration would defeat purpose IRDAI has set itself. A more nuanced approach, in which market sets terms of sale and scale of commission, while regulator facilitates awareness and knowledge, and policies of malpractice and non-compliance, is more likely to promote India's objective of universal insurance coverage in future.
Tags: #InsuranceMisselling #IRDAl #Bancassurance #CommissionCap #BimaBharosa #FinancialStability #Lifelnsurance #PBFintech #ConsumerProtection #Universallnsurance