India’s insurance regulator is now trying to fix an incentive structure whose consequences have been visible for years. Its consultation paper proposes tighter controls on distribution commissions, greater scrutiny of incentives, stronger safeguards against mis-selling, identification of individual sellers, clawbacks and accountability for intermediaries. 

All of this is overdue. The more uncomfortable question is whether these measures, arriving after years of known problems, will actually change behaviour.

Mis-selling is hardly a new problem in Indian insurance. Customers have complained for years about unsuitable products being pushed, policies being sold without adequate explanation, exclusions being poorly understood and products being presented differently from what customers believed they were buying. 

Claims settlement has been another enduring source of consumer dissatisfaction, with policyholders questioning delays, repudiations, exclusions and the gap between the protection they thought they had purchased and what insurers eventually agreed to pay.

This matters because the problem has never been a complete absence of regulation. IRDAI has had conduct requirements, grievance mechanisms and enforcement powers for years. Yet mis-selling has persisted. 

Can the regulatory system explain why institutions benefiting from the sales model have not faced consequences strong enough to change their behaviour?

The new proposals deserve to be judged by what happens after the rulebook changes. Seller identification, clawbacks and public disclosure can create accountability, but only if supervisory rigour and enforcement reach beyond the salesperson and into the organisation that designed the sales architecture, fixed the targets and benefited from the business.

Regulatory Gaps
Insurance is unusual because the customer pays today for a promise that may be tested years later, often when illness, death, disability, accident or financial distress has arrived. The customer cannot judge the quality of the product merely when it is purchased. The real product is the promise, and its credibility is tested when a claim is made.

That makes the separation between sales conduct and claims conduct inadequate. A policy can pass a formal sales checklist and still leave a customer with an outcome very different from the protection understood at purchase. Consumer protection has to follow the customer through the full life of the policy.

IRDAI’s own analysis shows the sharp increase in distributor remuneration relative to new-business premium in some segments after the greater flexibility introduced in 2023. That gives the regulator a reasonable basis for intervention. But reducing commissions does not necessarily reduce the pressure to sell.

Insurers still want higher revenues, profits and valuations. Distribution businesses still have targets to meet. If the economics of selling change while commercial expectations remain intact, the incentive to push inappropriate products can migrate rather than disappear. A salesperson facing a tougher payout structure but an unchanged target may simply look for another product, another customer or another permissible incentive.

A commission cap can change the visible economics without changing the underlying culture. Regulation must follow incentives, not merely transactions.

Customer Outcomes
The regulator’s challenge is larger than fixing commission percentages. It must examine targets, incentives, persistency, cancellations, complaints and whether senior management is held responsible when poor customer outcomes become systemic. Otherwise, regulation risks making the salesperson accountable without making the institution that created the incentive structure equally accountable.

A board cannot reasonably treat persistent mis-selling, unusually high complaints, weak persistency or repeated claims disputes as merely distributor problems when the insurer designed the products, approved the distribution architecture and benefits from the premiums. Conduct risk belongs in the boardroom alongside financial, operational and regulatory risk.

The same principle applies to claims. The insurer has made the promise. Accountability should remain with the institution that made it.

For too long, responsibility has become fragmented. The intermediary blames the salesperson, the insurer blames the intermediary, the customer enters the grievance machinery, and the regulator examines the episode after the damage has occurred. The institution with the greatest ability to design the system should carry the clearest accountability for its outcomes.

There is another possibility that could reshape the industry. If distribution commissions become less attractive, will some of India’s largest distributors decide that they should move up the value chain and seek insurance-company licences themselves?

Large distributors already possess customer relationships, technology, data, brands and extensive distribution networks. Becoming an insurer could allow them to capture manufacturing economics and influence product design, pricing, customer acquisition and distribution. But that would happen only when economic benefits of such a move would be far higher than just remaining distributors.

Distribution to Manufacturing
That possibility deserves more than a passing glance. If distributors can no longer earn as freely from selling someone else’s products, becoming the manufacturer can change the economics altogether. The distributor could retain the customer relationship while capturing value previously shared with the insurer. Over time, the distinction between an insurance intermediary and an insurance manufacturer could become considerably less meaningful.

That could bring efficiencies. It could also concentrate incentives. When the same corporate ecosystem manufactures the product and controls how it is sold, the regulator will have to scrutinise conflicts of interest more carefully.

Vertical integration could make accountability clearer because responsibility sits within one institution. It could also concentrate conflicts because the same institution controls product design, pricing, customer acquisition and distribution. The framework must ensure that consolidation of economics does not mean consolidation of power over the customer.

The consultation is therefore about more than commissions. IRDAI is correcting the consequences of a framework that gave insurers and distributors greater flexibility. It now has to supervise those consequences with equal determination.

The deeper issue is regulatory capture. A regulator does not need to be compromised to become too accommodating of an industry’s commercial logic. Regulation can gradually become an exercise in managing the industry rather than disciplining it.

Consumer centricity cannot remain a phrase in consultation papers. It has to be visible in the economics of the business, sales behaviour, board decisions, claims and the consequences imposed when institutions fail customers.

The regulator has an opportunity to establish a different standard: the cost of poor customer outcomes must become greater than the commercial benefit of producing them.

The Indian insurance customer has heard enough about protection. What has been missing is confidence that poor conduct will have consequences for those who benefit from it. Another set of rules will matter only if IRDAI enforces them consistently and visibly.

Can IRDAI make insurance consumer-centric when the commercial incentive to sell remains powerful? Unless governance accountability follows the money and customer outcomes, the incentive will simply find another home.