After more than 15 years of unsuccessfully attempting to get the insurance regulator and the ministry of finance to curb rampant mis-selling in the insurance industry, reading the Insurance Regulatory and Development Authority of India (IRDAI)’s September 23 consultation paper, which wants to rework how insurance is sold in India, feels like vindication. All I have attempted to do over the years is to ask the insurance regulator and industry that the cheating of consumers should stop. Tell us what you are selling, what the product can do, what returns accrue, the costs of early exit, the chances of a claim getting paid, why persistency is so low, and why the agent has high commissions but no responsibility. Over all these years, these questions proved that I did not “know” insurance. And, that the policyholder must do their own due diligence — it is really their fault if they bought the wrong policy. IRDAI seems to have functioned more like an industry association than a regulator. So, to see a consultation paper from the regulator blowing the lid off unwarranted industry practices is quite surreal.
IRDAI adopted a smart strategy: It first put out data that makes the case for change and then proposed the necessary changes. If implemented, this will be the beginning of deep reform in India’s insurance sector, while keeping the consumer in mind. The industry forgets that what is good for the consumer will ultimately be good for the industry, one that has stagnated in recent times. A reset is needed, and the regulator is pointing the way.
As consumers, we need to know the two most important changes proposed that affect us.
One, the overall costs of running an insurance business will be brought down. The cost of doing business is as high as 39% in the life insurance segment and 48% of the premium in general insurance. Just about half the money is left for the true purpose of insurance — claims, returns, and other expenses.
The mutual fund industry’s cost of doing business is under 2.5% of the assets under management. The current cost levels in insurance are gouging benefits from policyholders. For life insurance, the new framework caps expenses at 15% of the premium in two years and 12.5% in five years. For general insurance, this will be 25% of the premium in two years and 20% in five years. From a consumer point of view, the glide path is too long. We have the technology and the ability to implement this much faster. Anything longer than a six-month glide path is a green signal for the industry to keep costs high. Lower costs will mean better returns to policyholders in bundled products and better claims payout in health insurance.
{{/usCountry}}The mutual fund industry’s cost of doing business is under 2.5% of the assets under management. The current cost levels in insurance are gouging benefits from policyholders. For life insurance, the new framework caps expenses at 15% of the premium in two years and 12.5% in five years. For general insurance, this will be 25% of the premium in two years and 20% in five years. From a consumer point of view, the glide path is too long. We have the technology and the ability to implement this much faster. Anything longer than a six-month glide path is a green signal for the industry to keep costs high. Lower costs will mean better returns to policyholders in bundled products and better claims payout in health insurance.
{{/usCountry}}Two, distributor commissions must go down. In 2023, in its infinite wisdom, the regulator — under a different chairperson — removed caps on commissions, and since then, the industry has gone wild with distributor payouts. Between 2022-23 and 2024-25, the premium of corporate agents in life insurance grew by 28%, while distributor payouts grew by 125%. The numbers for general insurance brokers are 37% premium growth with 173% growth in commission payouts. The story of motor insurance is even more stark — premium grew by around 34% while commission grew by around 259%. IRDAI proposes to reintroduce commission caps. Typically, commissions will go up as the policy holding period increases; a maximum of 25% still looks too high, but is a step in the right direction.
Along with the commission caps, IRDAI is proposing a raft of measures to make the seller responsible for the sale — such as disclosure of commission, tagging of the salesperson to the policy, and defining what is a mis-sale (for example, selling a regular premium policy in the guise of a single premium or not explaining the costs of early exit being proposed).
The regulator wants to change the course of the current distribution system that encourages premium collection and not service to policyholders. The high distribution costs, rising premiums and persistent claims-related consumer complaints have finally rung the bell at IRDAI’s Hyderabad headquarters, where the new chairman, Ajay Seth, has taken up the cause of investor protection with data-based regulatory action.
Of course, anything that is in consumer interest begets pushback from industry. While the impact on the profits of firms and agent livelihoods is being discussed, the distress of the policyholders, who have been cheated for so long and on whose premium rupee the whole industry parties, seems to have been forgotten.
Lobbying against the proposed moves has begun. The industry and lobbyists will submit reams of replies to IRDAI’s consultation paper. If you feel strongly about having being mis-sold a policy or your claim not getting paid, you also need to respond to the regulator who has asked the public and policyholders to give their feedback. Give your suggestions to the regulator on page 73 here.
Having been part of many regulatory interventions, I hope that the ministry of finance and IRDAI will look through the imminent threats of asset liability mismatch from the industry. The ultimate trump card will be used: the argument that this will put policyholders at risk, thanks to the changes making business unsustainable. The government can tell the industry that there is enough money to backstop any firm failure, but the firm or its group companies should forget about operating in India’s financial services sector after that. Viksit Bharat cannot have an insurance industry whose profits are built on the tears and curses of policyholders.
(The author serves on the Insurance Advisory Committee of IRDAI.)
Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal