Insurance Rules: Curb on hefty insurance agent commissions; IRDAI chief outlines new plan..
Insurance Rules: Customers are often sold insurance policies they do not actually need. In the insurance industry, this practice is known as "mis-selling." Customers have long complained that agents sell them unsuitable products for personal gain. Now, the insurance regulator, IRDAI, has resolved to root out this major issue.
IRDAI Chairman Ajay Seth spoke candidly about this matter in a media interview. He explicitly stated that the primary cause of mis-selling is the hefty commission agents receive. When agents earn a commission of 40 to 50 percent upfront, their focus shifts from selling the right product to simply meeting sales targets. The regulator has now introduced a consultation paper aimed at benefiting policyholders.
**Lower Commissions to Benefit Customers**
Ajay Seth clarified that any reduction in insurance companies' expenses should directly benefit the customers. Once the new plan is implemented, customers will receive better returns on life insurance policies, while general insurance will see an improvement in claim ratios. Reduced company costs will lead to lower insurance premiums—or at least curb future hikes. Under the new rules, first-year commissions will be reduced; instead, the remaining commission will be paid to the agent when the customer renews the policy. This ensures the agent remains engaged with the customer even after the initial sale.
**Record of Mis-selling Agents to be Maintained**
Reducing commissions alone is not enough to curb mis-selling. IRDAI is preparing to launch a public insurance registry that will maintain a comprehensive record of distributors or agents who engage in mis-selling. Currently, only customer KYC (Know Your Customer) details are recorded. With the new rules, customers will also be able to access the track record of their agents or suppliers. If there are numerous complaints against a particular agent, people will naturally exercise caution before purchasing a policy from them.
**Ban on bundling insurance with loans**
Forced bundling is a major issue in the market. Often, when you take a loan from a bank, a life insurance policy is forcibly tagged onto it. Taking a firm stance on this, Ajay Seth stated that while a lender may require life insurance for its own protection, it cannot expect to earn a commission from the associated premium. If a package is being offered, the benefit to the borrower must be clearly evident.
**Crackdown on 'dark patterns'**
'Dark patterns' are also being widely used in the insurance sector. When a customer simply wants to check premium rates online, they are often compelled to provide their mobile number, leading to a barrage of promotional calls. The IRDAI Chairman emphasized that insurance is a mass-market product; its pricing cannot be hidden behind a requirement for personal information. A lack of price transparency ultimately harms the customer. No company can force a customer to purchase a product they do not want.
Ajay Seth highlighted a crucial point: seven or eight years ago, the insurance industry was operating more efficiently at lower costs. Previously, expenses in the life insurance sector had dropped to 16.5 percent but have since risen again to exceed 20 percent. Similarly, costs in the general insurance sector have climbed from 25 percent to 32 percent. Companies need to revert to that earlier state of greater efficiency. The regulator has issued a consultation paper regarding these changes, to be followed by draft regulations. It is anticipated that these new rules could come into effect on January 1, 2027, or April 1, 2027.
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