IRDAI Plans Major Overhaul to Curb Insurance Mis-selling

Jyoti Rathi - Kolkata Bureau Jul 03, 2026 1,150 Views

The IRDAI is planning a major overhaul of insurance distribution to curb mis-selling and reduce high costs. The regulator intends to shift from upfront commissions to long-term, effort-based payouts linked to policy persistency. Additionally, new rules will digitally tag policies to specific agents, increasing accountability and transparency for consumers.

MUMBAI — The Insurance Regulatory and Development Authority of India (IRDAI) is set to unveil a comprehensive discussion paper on insurance distribution reforms aimed at curbing mis-selling and rationalizing the industry’s commission structures. As part of a wider effort to protect policyholders, the regulator is evaluating a transition toward an "effort-based" distribution model, which may link agent incentives to customer value and policy persistency rather than just initial sales volume.

The proposed overhaul, expected to be finalized following stakeholder consultations, addresses concerns regarding the sharp rise in distribution costs, which have led several insurers to breach prescribed expense limits. In the fiscal year 2025, life insurers paid approximately ₹60,800 crore in commissions, an 18% increase that has drawn intense regulatory scrutiny over whether such payouts incentivize aggressive, and often deceptive, sales practices.

Moving Beyond Upfront Commissions

Under the current system, agents and intermediaries often receive a significant portion of their compensation as an upfront commission upon the sale of a policy. Critics argue that this front-loaded structure encourages "churning"—where intermediaries persuade customers to lapse or surrender existing policies to purchase new ones—solely to earn fresh commissions.

To combat this, the IRDAI is considering frameworks that encourage staggered commission payouts. By linking remuneration to "persistency"—the duration a policyholder maintains their policy—the regulator intends to align the financial interests of distributors with the long-term needs of the consumer. This shift is designed to ensure that agents remain invested in the policyholder's experience well beyond the initial purchase.

Accountability and Transparency

In a related move to improve traceability, the regulator has proposed that every insurance policy be digitally tagged to the specific individual who facilitated the sale. This digital trail—covering bank employees, insurance agents, and authorized verifiers—aims to solve the "anonymity problem" in bank-led distribution (bancassurance), where customers often struggle to identify who provided them with misleading information.

"The primary objective is to make the sales process more transparent and accountable," according to industry analysts tracking the sector. By tagging policies to individual salespeople, the regulator hopes to deter the use of "dark patterns" in digital marketplaces and simplify the grievance redressal process when a policy is found to be unsuitable for a customer's profile.

Why It Matters

For the average consumer, these reforms are expected to lead to better advice and fewer instances of mis-selling. By shifting the focus from high-volume, commission-led sales to sustainable, need-based products, the regulator hopes to restore trust in the financial services sector. For the industry, the changes represent a pivot toward a more professionalized distribution network where quality of service and customer retention are rewarded over mere growth.

Key Facts at a Glance

Commission Reform: The IRDAI is reviewing commission models to reduce aggressive, volume-driven sales.
Focus on Persistency: New frameworks may link distributor payouts to how long a customer keeps a policy active.
Digital Traceability: Proposals include tagging every policy to the individual salesperson to curb mis-selling and improve accountability.
Curbing Dark Patterns: The regulator is actively monitoring digital platforms to eliminate manipulative sales practices.

FAQ

Why is the IRDAI changing how commissions are paid?

The current upfront commission model is believed to incentivize aggressive sales and mis-selling. The regulator wants to shift toward long-term, effort-based payouts to ensure agents focus on customer needs.

How will policyholders benefit from these changes?

These reforms aim to provide customers with more transparent advice, clearer accountability for the person who sold the policy, and a reduction in deceptive sales tactics.

What is policy persistency and why does it matter?

Persistency measures how long a customer keeps their insurance active. Higher persistency indicates that the policy was a good fit for the customer, which is why the regulator wants to tie agent rewards to this metric.

Source: IRDAI, India Today, Livemint, IAdvisor