NEW DELHI: It is inevitable that anyone who has bought insurance has done no comparison of different policies or a deep dive to study how the whole thing works. Inevitably, it was a word-of-mouth recommendation, or a bank officer insisting that you open an insurance in order to secure a loan, or a friendly neighbourhood dealer persuading you during a morning walk that he has the best insurance in the world to sell.
To cut a long story short, you bought a policy because someone was paid extremely well to persuade you that it was in your best interest. And this is precisely what the Insurance Regulatory and Development Authority of India (IRDAI) has now said in black and white.
Shocking numbers
Its two-part consultation paper, ‘Recalibrating Economics of Insurance Distribution’, released on September 23, put out some shocking numbers that explain the whole thing in perspective. It’s something that smart customers have long suspected, only that now the IRDAI has confirmed it.
Just look at the staggering figures: between FY23 and FY25, premiums granted to life insurance agents grew 28 per cent, but their commissions or outflow grew by 125 per cent. For general insurance brokers, there was 37 per cent more premium to collect, and they were paid a whopping 173 per cent more in commissions. The average broker commission on retail health cover grew from 10 per cent to 30 per cent, and in some segments, once bonuses, travel, and brand payments were taken into account, the effective payout moved from 60 per cent to close to 90 per cent.
Here is a rough translation as done in an analysis in the Free Press Journal: a Rs 1 lakh premium credit-linked life insurance policy could see a bank’s commission reach as high as Rs 57,000. The IRDA draft would reduce that commission to Rs 2,000. What this insurance seal does is actually reward the sale, not the effectiveness, or the efficacy of the insurance. It is the customer who is paying for the whole structure – the commission, the insurance, and all the administrative costs. Private life insurers’ expense ratio has crept from about 16.5 per cent in FY21 to 20.2 per cent in FY26, and for private general insurers from roughly 25 per cent in FY19 to 32.1 per cent in FY26. All this is at the expense of the poor customer.
Read between lines
The proposals that matter most are the ones you have to read between the lines. For example, banks and NBFCs can no longer make buying insurance a condition of creditworthiness. Borrowers could pick their own insurance, pay directly, and refuse cover from a bank without the fear of losing a loan. Every policy would be tagged to the salesman or the person who sold it. This would ensure mis-selling can be traced and commissions can be clawed back.
Mandatory third-party motor insurance for new vehicles would carry no commission for distributing institutions, and every product would need a one-page executive summary. Customers would also have to hear directly from the insurer before a policy is issued.
The profit-driven market reacted badly to the proposals. Shares of companies like PB FinTech, the parent company of Policybazaar, fell by roughly one-third during one trading session. The company management also said that close to 30 per cent of its revenues are likely to be impacted if these policies are implemented.
Of course, those likely to lose a huge chunk of their income have every right to make their case, and the comments on this consultation paper are open until October 25. But let’s be clear that a falling share price does not reflect consumer welfare. On the contrary, it reflects insurer peril. IRDAI Chairman Ajay Seth, quoted by The Economic Times, said that mis-selling of insurance is a direct consequence of huge upfront commissions and that his singular goal is to ensure more value for policyholders.
Enforcement gap
Perhaps the most important statement in IRDAI’s paper is that the buyers are at the heart of the solution. It clearly states that awareness, affordability, product design, and trust are issues the institution cannot fix on its own. Lower costs will not reach policyholders instead of insurers’ margins unless and until there is an agile, nimble, and highly reactive family of buyers.
The bottom line: be sceptical and keep your eyes and ears open. IRDAI added in 2023: remove product-wise commission caps, and the institution admits in its paper that it misused that freedom. It also acknowledges that there was a gap in enforcement
In its two-part consultation paper, IRDAI put out some shocking numbers that explain the whole thing in perspective. It’s something that smart customers have long suspected, only that now the IRDAI has confirmed it
