Did your agent mis-sell insurance? IRDAI proposes clawing back their commission under new reforms

Buying an insurance policy often involves relying on an agent, bank employee or other salesperson to explain what the policy covers, how much it costs and whether it actually suits your needs. If that advice is misleading, the financial consequences can extend well beyond the premium paid by the customer.

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a measure that could directly affect the person selling the policy. Under its consultation paper on insurance distribution reforms, insurers would be expected to claw back commission when an instance of mis-selling is established. The proposal is aimed at making the person selling the policy financially accountable for such conduct.

What could change for insurance buyers

At present, a consumer may not know much about the incentives earned by the person selling an insurance policy. IRDAI’s proposal seeks to make the sales process more accountable by linking the identity of the salesperson to the policy sold.

The regulator has proposed tagging the functional identity of specified persons, salespersons and PoSPs of insurance distribution entities, as well as agents or associates of insurers, to the policies they sell. It has also proposed making information about instances of mis-selling available in the public domain through the Public Insurance Registry.

For a consumer, the significance is that a salesperson’s record of mis-selling could potentially become part of the information available about that person.

What counts as mis-selling

IRDAI’s consultation paper proposes a detailed suitability framework for insurers and insurance distribution entities. For life insurance sales above a defined ticket size, insurers would be required to document the customer’s needs and suitability and maintain an audit trail. A customer’s signature or consent alone would not absolve the insurer or intermediary if the product sold was unsuitable.

The paper lists several examples of practices that could attract disincentives or regulatory action. These include selling a regular-premium product as a single-premium product, failing to explain the consequences of stopping premiums and low surrender values, selling insurance to customers who may not have the income or circumstances to sustain the premiums, and presenting insurance products as fixed deposits or high-return investments.

It also identifies selling products with false promises of assured returns and inducing customers to surrender an existing policy and buy another based on misleading claims of better returns as examples of mis-selling.

Your consent may not be enough

One important consumer protection proposed by IRDAI is that simply signing the policy documents may not settle the question of responsibility.

The consultation paper says that where a customer chooses a product different from the one recommended through the suitability analysis, the reasons should be documented. It also states that mere customer consent or signature should not absolve the insurer or intermediary from responsibility for selling an unsuitable product.

This could matter particularly when insurance is presented as an investment or savings product rather than as insurance, since the regulator has specifically flagged such practices.

Commission could be clawed back

The most direct financial consequence proposed by IRDAI is commission claw-back. The consultation paper states that instances of mis-selling should also lead to commission claw-back by insurers.

IRDAI has also proposed including direct and indirect remuneration, including monetary and non-monetary incentives, within the regulatory definition of commission. It proposes prohibiting volume-linked or reward-linked incentives for bank and NBFC staff selling insurance. The paper cites trips, luxury gifts, milestone bonuses and contest rewards as examples of incentives that can create conflicts with customer suitability.

For consumers, the broader message is that the proposed framework would shift more accountability towards the distribution side of insurance sales. However, these measures are proposals in the consultation paper and not current rules. The final regulations will determine how mis-selling is established and how any commission claw-back is actually implemented.