Insurance Bill Tightens Norms, May Curb Mis-Selling

India’s insurance penetration is still in single digits, which means a large part of the country still isn’t insured. Even among the people who do have insurance, many don’t fully understand their coverage and in many cases, the insurance product sold to them is not suitable for their life stage, income or needs.

So, the problem is not only low penetration. The deeper problem is the gap between access, understanding and suitability.

A new set of legal changes in the Insurance Bill, 2025, under the Sabka Bima Sabki Raksha Bill, 2025, is designed to tighten rules around mis-selling, especially by making commissions more transparent and reducing conflicts of interest in distribution.

Finance Minister Nirmala Sitharaman said in Parliament that the purpose of the bill is to establish an extensive framework for the protection of policyholders, mandate insurers to provide critical information to policyholders at the time of issuance, tighten timelines and ultimately give stronger protection so customers can take more informed decisions.

Mis-selling isn’t necessarily a fraud. In real life, it is often small actions that push a customer into the wrong product.

• Insurance sold like an investment product: A customer wants safety and savings. They are told, "This is like a fixed-return plan or you will get good returns." The protection part is not discussed properly, and the customer later realises the product has long lock-ins, surrender charges and returns that are not as simple as they were told.

• Insurance pushed inside a bank relationship: This is very common. A person visits a bank for a fixed deposit or a loan. The insurance pitch comes in as a recommended product. Sometimes, it is made to sound like it is required or linked to approval. Even if it is not mandatory on paper, the bank setting creates pressure.

• Key terms not explained clearly: People are not told what matters most: what is excluded, what happens if premiums stop, when benefits apply, how much is guaranteed and what is not. The customer signs because they trust the seller, not because they fully understand the policy.

The deeper issue behind all this is incentives. When the seller earns more from selling a certain product, advice can start bending towards what pays more rather than what fits.

A useful way to understand mis-selling is to follow the money.

A 1 Finance Magazine analysis shows that India’s top 15 banks generated Rs 21,773 crore in FY24 from commissions earned from selling and marketing of life insurance, mutual funds and other third-party financial products.

Now think about what that means in plain terms: when a bank earns that much from commissions, insurance becomes less like advice and more like a sales target product.

The SWDL (Surrender/Withdrawal/Discontinuation/Lapse) ratio is a practical way to quantify how much of an insurer’s payouts are being driven by surrender/withdrawal/discontinuation/lapse outcomes (i.e., customers exiting early or policies collapsing before the intended maturity).

A high SWDL ratio is a red flag because it often signals that a large portion of customers are not staying the course, either due to product design that penalises early exit, affordability stress, or mis-selling/churning at the distribution layer.

FY2023-24: 39.73%

FY2022-23: 40.02%

When 40% of all payouts are already being driven by early exits, it suggests that a large slice of policies is not delivering the intended long-term outcomes.

Penetration is low but mis-selling makes it worse.

The bill gives the Insurance Regulatory and Development Authority of India more power. Not just to punish mis-selling later, but to reduce the incentives that cause it in the first place.

• IRDAI gets stronger control over commissions and disclosure: The amendments explicitly authorise Irdai to decide how commissions paid to agents and intermediaries are structured, capped and disclosed to policyholders. This opens the door for rules where customers can clearly see the commission element inside a policy, instead of it being hidden in complex pricing.

• Conflicts get stricter attention: Banks sell a large part of India’s new individual life insurance business premium. In FY24, banks contributed around 33% of the life insurance industry’s individual new business premium, while for private life insurers, banks accounted for nearly 52% of new individual life insurance sales. The bill tries to cut the hidden bias at the top by saying one person shouldn’t sit on both sides, like a director or senior officer of an insurer should not also hold a similar role in a bank or an investment company. This separation reduces the chance of quiet pressure that makes a bank push one insurer’s products.The intent is to reduce situations where influence at senior levels can quietly push banks to favour a specific insurer’s products.

• Tougher rules for intermediaries, with real enforcement power: The legal changes empower Irdai to set eligibility and “fit and proper” norms for intermediaries and to suspend or cancel registrations for violations. That matters because mis-selling does not happen only in banks. It can happen across agents, brokers, corporate agents, and online channels too.

If commissions become more visible and conflicts become harder to hide, selling will have to become more honest. That may slow down some aggressive sales in the short term, but it can strengthen the market in the long term.

However, the powers proposed to be given to the insurance regulator must be exercised and supervised adequately to bring reforms.

In a country where penetration is still low, the next phase is not just about selling more policies. It is about selling policies people actually keep, understand and trust.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.