Misselling misunderstood: The regulator’s proposal is tantamount to addressing the symptom, while ignoring the cause

In FY25, the insurance sector collected ₹11.93 lakh cr in premium and issued 41.84 cr policies. Insurance penetration - premium as a share of GDP - stood at 3.7%, unchanged from the year before. Life insurance penetration slipped to 2.7% from 2.8%, while non-life penetration stayed flat at 1%. In FY26, however, ₹13.30 lakh cr of premiums were collected, reflecting growth of 12.5% in life insurance and 11% in non-life, respectively. Once again, life and non-life insurance penetration stayed flat.

So, the industry was selling more than ever, while failing to drive two key IRDAI objectives: reach, and access. Instead, the industry was more successful at selling to existing customers than it was at acquiring new customers or retaining clients of recent vintage. Something had to be done. But what?

According to RBI's June 2026 Financial Stability Report, the 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 report, however, went on to state that instances of premature 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 evidence, coupled with a public rebuke 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.

Thus, on Sept 23, IRDAI'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 tantamount to addressing the symptom, while ignoring the cause.

Unsurprisingly, the market's reaction was visceral. Share prices of PB Fintech and Turtlemint 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. IRDAI'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 the bancassurance channel - partnership between a bank and an insurance company - while significant, is not the only distribution line to be affected. And it's in the inflexible, one-size-fits-all nature of the remedy - in which smaller companies may be disadvantaged and brokerages may see up to 1 mn jobs lost by 2030 - that the discussion paper falls short.

Misselling, after all, is driven by a person paid to complete the sale, rather than make the right one. So, while the discussion paper aims its sights at remuneration tied to a coercive transaction, it's likely to target worst offenders, while leaving core mechanisms of this sharp practice intact for 3 reasons:

The cap reduces the incentive but not the intent, by rewarding a lower volume of sales with a smaller incentive.

Any IRDAI regulation to attack the cost of a problem, rather than the issue itself, is likely to migrate the object of misselling from one product to another - from a capped one to a less capped one, from unit margin to cumulative volume, even replacing commissions with fees to make up the earning deficit.

Any such action will only affect the direction of future policies, not salvage millions of policies already sold and surrendered that constitute a breach of trust as much as poor business practice.

When Australia faced a similar issue, it simultaneously introduced commission ceilings with clawbacks. If a policy was surrendered in the first 2 yrs, almost the entire commission had to be returned. By redirecting the incentive to reward renewal and penalising a one-time transaction, the seller was invested in making sure that a customer was sold an appropriate product.

A progressive commission cap, along with performance refunds, is something the Indian regulator should consider along with the introduction of 3 other actions:

Name and shame: With teeth like those of RBI and Sebi, the insurance ombudsman should use its grievance portal, Bima Bharosa, to publicly list insurers and distributors that consistently missell and reject claims, so customers can make informed decisions. Furthermore, being listed should carry a commercial penalty commensurate with the violation.

Training before selling: Misselling often occurs on account of incompetence, rather than malicious intent. Mandatory and rigorous annual training should be enforced to build 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 a panacea for misselling and under-penetration would defeat the purpose IRDAI has set itself.

A more nuanced approach, in which the market sets the terms of sale and scale of commission, while the regulator facilitates awareness and knowledge, and penalises malpractice and non-compliance, is more likely to promote India's objective of universal insurance coverage in the future.