Irdai has no plan to manage insurance distribution channels despite mis-selling

Mumbai: Even as mis-selling of insurance plans by banks has drawn scrutiny, the sector regulator doesn’t want to manage distribution channels and seeks to focus on customer awareness to check the malpractice.

“It’s not necessary that every mis-selling is mis-selling, it’s also about the customers’ understanding of the product,” said Swaminathan S Iyer, member (life), Insurance Regulatory and Development Authority of India on the sidelines of an event on Wednesday. “Once you drive home that your understanding is different from what the product is…then I think the absolute number on mis-selling will definitely reduce.”

The regulator has facilitated an open architecture for banks and insurance companies, and it is now up to the individual entities to decide how they sell products, Iyer said, adding that more clarity on the matter will be available once the Insurance Amendment Bill is passed.

On whether the regulators can mandate an open architecture for banks to sell products of multiple insurers instead of only the insurance company promoted by them, Iyer said it’s a matter that the Reserve Bank of India (RBI) might have to take up.

State Bank of India andICICI Bank only sell insurance of group companies, even though they are allowed to partner with nine insurers, including three each from the life, general, and health segments.

“Distribution cannot be mandated; we can facilitate it. We’ll work towards it,” Iyer said, adding that as of now, Irdai’s complete focus is on growing insurance reach and penetration.

In November 2024, finance minister Nirmala Sitharaman and former Irdai chairman Debasish Panda had separately flagged rising instances of insurance mis-selling.

The finance ministry has asked banks and non-banks to stop offering incentives on insurance sales to eliminate this malpractice, Mint reported on 3 June. The department of financial services issued specific instructions, asking lenders to immediately review their marketing practices, sell insurance products only as per customers’ requirements, and not link sales targets to incentives.

Last month, RBI deputy governor Rajeshwar Rao said that mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to low-income households. “We are examining whether it necessitates framing of guidelines to address mis-selling of financial products and services by regulated entities,” he had said at a conference.

Insurers, however, want to focus on deepening their distribution.

Banks have almost 6-7 times more reach than all the branches of life insurance companies—a fact that is recognised by the government, HDFC Life managing director Vibha Padalkar told Mint in an interview last month. She also said that there is no conclusive data proving that mis-selling via the bancassurance channel is worse than overall mis-selling across the industry.

“Our focus should be on strengthening processes, not on curtailing bancassurance. We need more distribution touch points, not fewer,” she said.

Listing and disclosures

On whether Irdai is considering a road map for listing of insurance companies, like RBI has for banks, Iyer said the regulator has issued an advisory for listing but does not plan to mandate it.

According to Iyer, listing has three large objectives: transparency, governance, and capital. While capital has not been an issue for insurers, transparency is being driven through disclosures, which the regulator has already been mandating a lot more of, he said. Instead, Irdai would prefer to look at insurance listing on a case-to-case basis.

“As a regulator, we will only look at it from an insurer-to-insurer basis, and see what is the best fit for which company, and how do we drive that. Mandating will not be a good thought for now,” he said.

Padalkar had told Mint that a listing road map for large insurers would be healthy from a governance point of view.

“In insurance, most of the companies are unlisted and there is minimal disclosure, which adds to the opacity of the sector. There are unlisted companies managing over ₹75,000 crore worth of public funds,” she said, adding that even if these companies don’t list, it would be a good idea for them to start making disclosures like a listed company. “This would bring about a lot more transparency and improve market conduct,” she had said.

Awareness campaign

Iyer was speaking at the sidelines of an event by the Insurance Awareness Committee (IAC) to launch ‘Sabse Pehle Life Insurance’ awareness campaign. The IAC, part of the industry body Life Insurance Council, plans to spend ₹150-160 crore every year on this campaign, members said at the event.

Life insurance is growing at a compounded annual growth rate (CAGR) of 9.5%, according to Irdai data. The total premium of life insurers stood at ₹8.29 trillion as at the end of FY24, up from ₹7.82 trillion in FY23. The total premium has grown at a CAGR of 10% over the last five years.