IRDAI Chairman Highlights Reforms to Curb Mis-Selling and Improve Insurance Value

The Insurance Regulatory and Development Authority of India (IRDAI) is advancing several regulatory reforms aimed at improving the insurance sector’s integrity and ensuring better value for policyholders. IRDAI Chairman Ajay Seth recently discussed these initiatives in an interview with BusinessLine, outlining steps designed to tackle mis-selling, improve commission structures, and enhance transparency in health insurance claims.

The regulator has introduced a consultation paper titled ‘Recalibrating Economics of Insurance Distribution’, which has generated substantial feedback from insurers, distributors, and industry bodies. The consultation remains open until October 25, after which the IRDAI will carefully evaluate all suggestions backed by data and sound economic reasoning before issuing draft regulations for further public comment.

Mr. Seth emphasized the importance of hearing directly from policyholders and the general public, noting that their input is crucial to shaping reforms that truly benefit the end consumer rather than only the regulated entities.

One major focus of the reforms is addressing the rising expense of management (EoM) and commission payouts, which have increased significantly in recent years. While the 2023 framework allowed insurers flexibility in commission policies approved by their boards, this resulted in distributors receiving higher rewards without corresponding benefits for policyholders. For example, expenses for private life insurers rose from approximately 16% in fiscal year 2021 to around 22% currently, while private general insurers saw an increase from about 25% in fiscal year 2019 to nearly 32%.

Despite these rising costs, premium growth has only kept pace with India’s GDP, and the number of policies has not expanded sufficiently. The IRDAI recognizes that flexibility in commission structures is not inherently flawed, but without appropriate guardrails, it can lead to unintended consequences. The proposed framework aims to combine more disciplined oversight with differentiation to shift from commission-driven distribution to one focused on quality and value.

Regarding the timeline, the IRDAI plans to consider all feedback by late October before releasing draft regulations for public review. The final rules are expected to be implemented either on January 1, 2027, or April 1, 2027. The regulator intends to introduce expense limits gradually, allowing insurers time to adjust their cost structures. Mr. Seth underscored that getting the reforms right is more important than rushing their implementation.

For policyholders, the reforms aim to deliver tangible benefits. Lower costs should translate into more affordable premiums or slower premium increases, improved returns on savings-oriented products, and stronger claim outcomes. The regulator also seeks to ensure a fairer purchase experience, with transparent product and pricing information accessible without requiring customers to share personal data prematurely.

Mis-selling has been a persistent issue, largely due to high upfront commissions that reward agents heavily for first-year sales while offering little incentive for policy maintenance. Current first-year commissions can range between 40% and 50%. To combat this, the reforms propose lowering initial commissions and increasing payments based on policy persistency. This approach encourages agents to sell appropriate products that remain in force, ultimately benefiting consumers.

The new rules will also establish a stronger obligation on distributors to record customer needs and demonstrate product suitability linked to the salesperson. In cases where mis-selling is proven, the entire premium will be refunded to the policyholder, commissions will be recovered, and responsibility will be jointly shared by the insurer and distributor. The identity of the agent involved will be documented. Additionally, bundling insurance with loans will be prohibited, and the forthcoming Public Insurance Registry will enhance transparency by providing information about insurers and distributors involved in each policy.

Price hikes in health insurance due to medical inflation, often cited at 14-15%, have raised concerns among consumers. IRDAI acknowledges the reality of rising healthcare costs but points out that premium increases are influenced by a combination of claim experience and insurer expenses, including operational and distribution costs. To better understand these factors, the IRDAI has set up joint working groups with healthcare providers and insurers, which are conducting detailed studies on claims and medical inflation. These findings will inform future regulatory actions.

Addressing the frequent complaints about claim rejections in health insurance, the IRDAI is implementing measures at multiple levels. Insurers must have Claims Review Committees that approve any claim denial with documented reasons aligned with policy terms. Collaborative efforts between hospitals and insurers are underway to develop a joint code of conduct, standardize provider categories, and expand the National Health Claims Exchange to streamline claims processing.

Looking ahead, comprehensive claims management reforms are planned for the financial year 2027-28. The Public Insurance Registry will enable customers to access an insurer’s claims performance records prior to purchasing a policy. This move aims to shift the focus from headline claim settlement ratios to the actual amounts paid out, providing a clearer picture of insurer reliability.

These reforms reflect IRDAI’s commitment to fostering a more transparent, customer-friendly insurance market in India. By emphasizing persistency-based commissions, banning forced bundling, enhancing claims transparency, and improving product suitability, the regulator seeks to build greater trust and value for policyholders.