IRDAI proposal links mis-selling to commission claw-backs
A consultation paper proposes commission claw-backs for mis-selling, seller-level policy tagging and suitability checks for larger life policies.
Insurance mis-selling could soon carry a direct financial penalty for the seller, with commissions paid on a policy liable to be clawed back if the sale is found unsuitable, under proposals outlined in a consultation paper released late on Wednesday.
The draft changes to distribution rules would also require insurers and distributors to identify the individual responsible for each policy. Every policy would be tagged to the functional identity of the person who sold it, and instances of mis-selling could be recorded in that person's performance history and placed in the public domain.
For life insurance sales above a defined ticket size, documented needs and suitability analysis would become mandatory. Customer consent would not shield the seller if a policy is later judged unsuitable.
The framework lists twelve specific illustrations of mis-selling. These include selling non-participating products in place of bank deposits, selling unit-linked insurance plans to risk-averse customers or those past working age, selling regular-premium products to buyers without steady income, and selling life products for inheritance planning.
The proposals are part of a broader effort to tighten suitability, transparency and accountability in insurance distribution, and respond to concerns over distribution costs and incentives. The consultation paper also seeks to reintroduce commission caps across life, health and motor insurance.
On incentives, the draft would bar volume-linked and reward-linked benefits, monetary or otherwise, for bank and NBFC staff who sell insurance. Premiums would have to flow directly from a customer's own account to the insurer, with third-party payments prohibited except through Bima-ASBA.
For customers, dark patterns would be prohibited, and product features, pricing and claims performance would have to be accessible without first sharing personal details. Insurers and large distribution entities would be required to publish their commission policies on their websites, while commissions would be disclosed on policies with cover above Rs 500 million.
The proposals follow concerns that payouts have outpaced premium growth in some channels. Among sampled life corporate agents, new business premium rose 1.3 times from Rs 630 billion to Rs 800 billion between FY2023 and FY2025, while remuneration increased 2.3 times from Rs 96 billion to Rs 216 billion.