Regulatory Push to Curb Insurance Mis-selling | 06 Apr 2026

Source: TH 

The Reserve Bank of India (RBI) is preparing to release its final guidelines on ‘Responsible Business Conduct’ to curb the mis-selling of third-party financial products by banks, bringing the Insurance Regulatory and Development Authority of India (IRDAI)'s commission structures under critical review to protect citizens.

• Root Cause of Mis-selling: Insurance mis-selling refers to the deliberate or negligent sale of a product or service that is unsuitable for the customer’s needs. 
  • The primary driver of aggressive mis-selling is the front-loaded, high commission structure regulated by IRDAI.  
  • Because agents earn the bulk of their fees upfront, they are heavily incentivized to push products aggressively rather than providing long-term policy servicing. 
  • According to IRDAI’s FY25 annual report, total life insurance commissions hit Rs 60,800 crore (an 18% year-on-year increase), while premiums grew only in single digits. 
• Limitations of Existing Regulation: Instead of directly capping how much commission an agent can make on a single policy, IRDAI's existing regulation simply caps the overall Expense of Management (EOM) for the entire insurance company. 
  • This gave insurers too much flexibility. Companies managed to stay within their overall EOM limits by cutting costs elsewhere, while continuing to funnel massive, disproportionate commissions to agents to drive aggressive sales. 
• Recommended Solutions for Commission Reforms: IRDAI's proposed reforms include directly fixing commission rates, introducing caps, and expense-based limits though industry experts caution these alone may not curb malpractices effectively. 
  • To ensure accountability, industry experts suggest making the Board of Insurance Companies responsible for fixing commissions via a board-approved policy, ensuring payouts strictly stay within overall EOM limits alongside regulatory disclosures. 
• The Shift to Trail-Based Commissions: A highly recommended structural reform is transitioning to a staggered, trail-based commission model.  
  • By paying commissions incrementally over the life of the policy, the financial incentives of the seller become directly aligned with the long-term welfare of the buyer, ensuring better persistency and restoring trust in the insurance sector.