Insurance mis-selling is arising because upfront commissions are too high: Ajay Seth, Chairman, IRDAI

Ajay Seth, chairman of the Insurance Regulatory and Development Authority of India (Irdai), discusses with ET the mounting concerns over mis-selling and cost efficiencies, explaining the broad central theme that prompted the regulator to issue its consultation paper on proposed sectoral reforms that will likely take effect next year. Edited excerpts:

What is the principal objective of the consultation paper?

The intent is, first, to expand coverage; second, to improve affordability; third, to enhance accessibility; and fourth, to tackle compulsory bundling and reduce mis-selling.


If I have to identify one goal, it is to enhance value to policyholders. By doing so, trust in insurance will grow and so will be uptake, making distribution relatively easier, expanding coverage and ultimately improving the economics of insurance. It will build stronger insurers and distributors aligned to policyholder expectations.

Do you believe insurers will pass the savings from lower commissions on to customers, or could they retain the benefit?

The expectation is very clear: the benefit of cost efficiency should be passed on to customers. This entire exercise is intended to ensure that the public and policyholders benefit. For a life insurance savings product, the outcome should be better returns. In general insurance, it should result in better claim ratios. Cost efficiencies should get passed on through lower premiums, or the rate of increase in premiums should be moderated, or returns on savings products should be better than they are today.

Once higher commissions no longer determine insurer access to distribution networks, they will differentiate themselves and compete on price, products and service quality.

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The paper identifies mis-selling as a major concern. What is driving it?

Mis-selling is arising because upfront sales commissions are too high and there is hardly any for persistency. The first-year commission on new business is high as 40% to 50%. The incentives are therefore for the sale rather than for the right quality. The paper seeks to take the next step after the Reserve Bank of India's directions on the suitability of products. The idea is to create greater awareness about mis-selling, establish a position under law and use the proposed public insurance registry to document and disclose poor conduct.

How widespread is mis-selling?

Of the grievances that are received, a good 40% to 50% fall within the category of unfair business practices. A large proportion of these would involve mis-selling. Unfair business practice is a broader term, but the number is large. Mis-selling is not uncommon.

How will lowering first-year commissions reduce mis-selling?

There are two measures. First, remove the incentive for mis-selling. The commission should be lower in the first year, with more being paid as the policy persists and moves into the renewal period. That should encourage better behaviour. Second, put relevant information in the public domain. If a distributor has a higher incidence of mis-selling or other conduct problems, customers should be able to examine that distributor's performance. It is not just about "know your customer". The customer should also be able to "know your supplier".

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When could the new framework take effect?

This is a consultation paper. It will have to be followed by draft regulations, which will also be placed for public consultation, before the final regulations are issued. One possibility is to implement the framework from January 1, 2027, or from April 1, 2027.

What information do you propose to make public?

There are three user propositions- know your product, know your insurer and know your distributor. A customer should be able to see which products are available, the performance of products, the number of grievances against an insurer or distributor, and how quickly and accurately claims are settled. The public insurance registry can bring together product information and performance data. Insurance involves paying a premium today against a promise that a service will be provided if the need arises, in the future. Because the service comes much later than the payment, the responsibility to disclose performance is even greater. There is significant information asymmetry in the insurance sector. It should not be allowed to remain.

What message does Irdai want to send by imposing penalties in recent mis-selling cases?

The message is very clear - that such conduct is simply unacceptable. The cases are such that penal action is warranted, merely issuing a warning would not do justice. But imposing a heavy penalty in every case is not the solution. The system has to improve. The systemic solution is to remove incentives for mis-selling and ensure that poor conduct becomes known in the public domain.

Who will decide whether a policy has been mis-sold?

With lakhs of policies being sold, every case cannot be subjected to a long-drawn adjudication process. A mis-sold product will not meet the "suitability for customer" criteria. However, there has to be an efficient test within the insurance sector and within the company itself to establish what constitutes mis-selling. A framework will have to be put in place. If an intermediary sells hundreds of policies, one or two may become mis-selling cases. But if the number becomes significant, it is really a cause for concern. We have defined mis-selling. Public comments may identify other forms, which can then be considered.

What is the thinking behind prohibiting compulsory bundling of insurance with loans?

A lender may want additional security by way of life insurance, but it cannot expect to earn a commission from that premium. That said, a package may still be acceptable if it provides a demonstrable benefit to both the borrower and the lender, but there have to be guardrails.

What payments beyond commissions is Irdai seeking to curb?

The intended direction is that commission limits should include all payments made to distributors. An insurer should have no other reason to pay anything to a distributor. The regulations never expect payments to be made to circumvent commission limits.

In addition, Irdai will closely monitor related party transactions, whether or not they involve a distribution arrangement. If a payment falls within an overall limit, that does not automatically make it acceptable conduct.

The proposed cap disincentivises digital distributors. Your comments?

I would not like to comment on the business model of any insurer or distributor. It is for them to decide. I would make a generic statement. Any market, whether it is a product market or a capital market, rewards through price signals those who have a customer-centric model. Each company has to decide what is in the best interests of its customers. The interest of the policyholder is paramount.

What are the dark patterns that concern Irdai?

Customers are often required to provide a telephone number and exemptions from restrictions on promotional calls before they can obtain an insurance premium quote. Insurance is a mass-market product meant for crores of people. Pricing cannot be hidden behind a veil of personal information. When pricing and product performance are not clearly known, information asymmetry increases and customer outcomes suffer. While this is perhaps the most common instance, but Irdai is concerned about all patterns where the customer is forced or misled to buy what he did not want.

Where do you expect the greatest resistance to the proposals?

That is a hypothetical question. We have examined multi-year data, drawn evidence-based inferences and placed them in the public domain. The intention is to nudge all stakeholders towards serving customers better. A business model focused only on a particular set of stakeholders, and not on customers, will find the transition difficult. If somebody is not ready to change, there will obviously be pushback. But this is a consultation paper. If somebody proposes a different approach, it should be backed by economic or business logic and should be in the interests of policyholders.

Can insurers operate at the lower expense levels proposed in the paper?

The industry operated at lower levels seven to eight years ago, so there is no reason why it cannot do so again. Operating expenses and commission expenses were lower. We are saying that the industry has been in that better space before. Certain flexibility was provided with the expectation that the industry would move towards greater cost efficiency. But the guardrails may not have been articulated properly. Instead of quality-led and cost-efficiency-led sales, the approach became distribution-led and commission-led. Life insurance expenses, which were above 20%, came down to around 16.5% and then went back above 20%. In general insurance, they were around 30%, came down to about 25% and then rose to around 32%.

What is the central message to the insurance industry?

The policyholder's interest is paramount. The customer has to be served in a commercially sustainable manner, and insurers must be profitable while distributors must earn an adequate income. But both have to meet the fundamental test: are they serving the customer fairly? The industry has operated at more efficient levels before. The aim is to regain those levels, improve further and ensure that the gains reach policyholders through wider coverage, fairer sales practices, lower or more moderate premiums, better returns and stronger claim outcomes.