India Pushes Long-Term Commission Model to Reduce Mis-Selling in Insurance

Int’l Desk: India’s insurance watchdog is gearing up for a significant shake-up in how agents and distributors get paid, with the aim of stamping out the persistent problem of mis-selling that has long plagued the sector. According to Reuters, the Insurance Regulatory and Development Authority of India, or IRDAI, is looking at shifting away from those hefty upfront commissions that have sometimes encouraged salespeople to push products regardless of whether they truly fit a customer’s needs.

Instead, the regulator is considering proposals that would spread commission payments over the entire life of a policy, much like practices already common in major markets such as the United States, Britain, and across Europe. This change, part of a wider review of distribution practices, could help align incentives more closely with long-term customer satisfaction and policy retention rather than quick sales numbers. Reuters also mentioned that a draft framework might be circulated within the next four to six weeks.

The move comes as India continues to emerge as one of Asia’s most dynamic insurance markets, with annual gross premium collections surpassing 11.9 trillion rupees, equivalent to about $125 billion. Yet insurance penetration remains stubbornly low at just 3.7 percent of GDP in 2024, well below the global average. Heavy upfront payouts, which can reach as much as 40 percent of premiums on certain life and health products, have often been blamed for fueling policy churn, where customers lapse or switch plans frequently after realizing the product wasn’t quite right for them.

IRDAI Chairman Ajay Seth hinted at these reforms last week when he spoke about preparing a consultation paper on distribution that could be released by the end of July. The broader effort also seeks to tackle high distribution costs that eat into affordability in a market the government has been actively trying to expand. Recent steps, including slashing taxes on individual health and life premiums to zero from 18 percent and opening the sector fully to foreign direct investment, have already drawn more overseas interest from players like South Korean insurers.

Beyond staggering the payments, the regulator is reportedly exploring ways to link commissions more directly to the actual effort involved in selling and servicing policies. That could mean higher rewards for agents who provide genuine face-to-face advice, handle paperwork, and assist with claims, compared to simpler bancassurance models where banks tack on policies as add-ons. There is also talk of capping commissions based on product type, policy duration, and complexity, along with tighter disclosure rules to bring more transparency to what distributors actually earn.

Industry watchers see this as a timely intervention in a sector that has more than 60 insurers, ranging from the giant state-owned Life Insurance Corporation of India to private names like ICICI Prudential, HDFC Life, and ICICI Lombard, not to mention foreign entrants such as Prudential and AIG. For years, consumer groups and even some within the industry have highlighted how mis-selling erodes trust and holds back deeper penetration, especially among middle-class households wary of complex financial products.

If implemented, these changes could reshape relationships between insurers, agents, and customers, potentially leading to more sustainable business practices even if they squeeze short-term sales volumes for some distributors. For now, the industry awaits the formal consultation, which many expect will spark lively debate before any final rules take shape. As one executive put it privately, getting the balance right between curbing abuses and maintaining a motivated sales force will be no small challenge in such a competitive and fast-evolving market.