Irdai chairperson Ajay Seth addressed growing industry concerns around mis-selling practices and operational cost efficiencies, outlining the core rationale behind the regulator's recently released consultation paper on proposed reforms to the insurance sector, which are anticipated to come into force in the coming year.
The consultation paper pursues four broad objectives: broadening coverage, making products more affordable, improving ease of access, and addressing forced bundling while curbing mis-selling. Improving outcomes for policyholders represented the primary objective Seth outlined.
Proponents argue that building consumer confidence in insurance products could, in theory, drive higher adoption rates, ease distribution challenges, broaden coverage reach, and strengthen the sector's financial viability. The aim, Seth indicated, is to develop more resilient insurers and distributors that are better attuned to the needs and expectations of policyholders.
When asked whether lower commissions would translate into reduced costs for policyholders, Seth indicated that the expectation among industry participants is that any efficiency gains should be reflected in what customers pay. The process, he said, is designed to protect the interests of both consumers and those holding insurance policies.
Holders of life insurance savings products may expect returns to vary depending on market conditions and product terms. Within the non-life insurance sector, the development is expected to lead to improved loss ratios. Any cost savings achieved, Seth said, ought to be reflected in reduced premiums, a slower rate of premium growth, or improved returns on savings products relative to current levels.
Removing higher commissions as a gateway to distribution networks would push insurers to compete for business through pricing, product offerings, and the quality of their services, Seth said.
Seth described mis-selling as a broadly prevalent problem, pointing to excessive upfront sales commissions and a near-absence of incentives tied to policy retention. During the initial year, commissions on newly written policies can reach between 40 and 50 per cent. Financial rewards, he noted, are structured around completing transactions rather than delivering appropriate standards of quality.
The consultation paper aims to build on existing Reserve Bank of India product suitability guidelines by raising public awareness of mis-selling, establishing a formal legal framework, and leveraging the proposed public insurance registry to record and disclose instances of poor industry conduct. Between 40 and 50 per cent of all complaints lodged relate to deceptive or unfair conduct by businesses, with the majority of those cases relating to mis-selling practices.
Seth proposed two steps aimed at cutting initial-year commissions and curbing mis-selling. One approach under consideration involves restructuring commission arrangements so that payments are weighted toward policy renewal periods rather than concentrated at the point of sale, thereby reducing the financial motivation to mis-sell.
On transparency, Seth said that where a distributor shows an elevated rate of mis-selling or related conduct failures, consumers should have access to that distributor's track record. Consumers, he added, have a right to transparency regarding the origins of their products.
Under the proposed timeline, the rules would come into force either on 1 January 2027 or 1 April 2027, subject to a public consultation period on the draft regulations before their formal adoption.
Three guiding principles are outlined in the paper for consumers: understanding the product, the insurer, and the distribution channel. The paper states that policyholders should have access to information on product availability, performance metrics, complaint volumes against insurers or distributors, and the speed and accuracy of claims processing. A centralised insurance registry could consolidate product details alongside performance records, according to the document.
Seth acknowledged that insurers and policyholders often operate with unequal access to relevant information, and said that such an imbalance should not be permitted to continue. On the matter of recent mis-selling penalties, Seth indicated that such behaviour falls outside acceptable boundaries and that disciplinary measures are appropriate in the affected cases.
Applying maximum penalties across all cases would not address the underlying issues effectively, Seth said. Addressing the underlying problem, he added, would involve eliminating financial incentives that encourage dishonest sales practices and making instances of poor conduct transparent to the public.
Regarding the compulsory bundling of insurance with loans, Seth pointed out that while a lender may seek the protection of life cover as additional security, it is not entitled to derive commission earnings from that insurance premium. Such arrangements may warrant approval when they offer verifiable advantages to both parties involved, though he said regulatory boundaries remain necessary.
Fee caps for distributors, according to the proposed policy framework, are intended to encompass every form of payment channelled through those intermediaries. The regulator has indicated it will keep a close watch on transactions involving related parties, regardless of whether a distribution arrangement is in place. Seth noted that staying within a prescribed spending threshold does not, by itself, render a transaction compliant with expected standards of behaviour.
On the topic of dark patterns, Seth highlighted that insurers frequently require customers to hand over a phone number and consent to marketing calls as a prerequisite for receiving a premium quote. Coverage of that type of product typically spans broad consumer populations rather than a narrow demographic. Consumers, Seth said, have a right to transparent pricing that does not require the disclosure of personal data. The regulator has expressed concern over practices in which policyholders are pressured or deceived into purchasing products they did not seek.
According to Seth, cost levels in the industry were lower roughly seven to eight years prior. Life insurance costs dropped from over 20 per cent to roughly 16.5 per cent before climbing back above the 20 per cent threshold. The figure for general insurance stood at approximately 30 per cent, declined to roughly 25 per cent, before climbing back to around 32 per cent.
Seth said regulators conveyed to insurers that protecting the rights and needs of policyholders takes precedence above all other considerations. Policyholders, he said, need to be served in a way that keeps the broader industry financially viable, with carriers generating returns and distribution channels receiving fair compensation. The core requirement for both, Seth said, is whether they are treating consumers equitably.
The objective outlined in the consultation paper is to restore operational efficiency, drive continuous advancement, and channel those improvements to policyholders through broader coverage, equitable sales practices, more affordable premiums, enhanced returns, and stronger outcomes on claims.
