Whalesbook
Mis-selling Remains Stubbornly Entrenched in India's Insurance Sector
Mis-selling continues to plague India's insurance sector, defying repeated regulatory tightening and increased scrutiny. Despite sharper rules on disclosures, suitability, and customer consent, grievances linked to mis-sold products are rising as a proportion of total complaints. This highlights a significant disconnect between regulations on paper and actual sales behaviour.
Sales Incentives Drive Misrepresentation
Industry experts point to sales incentive structures as a primary driver. "The sales incentive structure hasn’t changed at the ground level," states Shilpa Arora, COO and co-founder of Insurance Samadhan. She explains that targets, contests, and high upfront commissions still reward closing deals rather than ensuring suitability. "When revenue pressure is high, misrepresentation becomes a shortcut," she adds.
Procedural Compliance Fails Customers
The Insurance Regulatory and Development Authority of India (IRDAI) has implemented stricter norms on need analysis, benefit illustrations, and customer acknowledgements, with further enhancements in 2024. However, Arora argues these measures often result in mere procedural compliance, or "tick-box compliance," without ensuring meaningful customer understanding. Acknowledgements can devolve into casually shared OTPs, with customers consenting without fully comprehending the terms.
Accountability Remains Diluted
A structural weakness lies in diluted accountability. Insurance sales often involve multiple layers, including agents, bank branches, bancassurance partners, and telecallers. "Everyone touches the sale, but responsibility is hard to pin," notes Arora. This diffusion of responsibility means penalties are often absorbed by the firm, failing to deter individual misconduct.
Banks' Role in Distribution
Banks, which dominate life insurance distribution as corporate agents, remain a key area of concern. Aggressive sales targets within some banks push insurance sales ahead of customer suitability. Fee-based income targets drive branch managers to push insurance products, often through insurer representatives stationed inside branches, leveraging customer data without adequate training for sales personnel on complex products like cyber or liability insurance.
Enforcement and Awareness Gaps
IRDAI's reviews frequently flag deficiencies in sales practices, but enforcement remains slow, with penalties often insufficient to outweigh commercial gains. Low financial awareness means many customers rely on trust-based buying, especially when insurance is sold by familiar bank officials or agents. This trust is exploited with sales pitches that misrepresent products as fixed deposits or loan requirements, leading to a mismatch between products and actual needs. Until sales incentives are realigned, individual accountability is fixed, and enforcement becomes swift, mis-selling is likely to persist.