Wrong Policy Sold? IRDAI Wants Agents’ Commission Taken Back
IRDAI proposes commission clawbacks for agents involved in mis-selling or incorrect policy sales, putting greater focus on accountability and consumer protection.
IRDAI proposes clawing back agents’ commissions when policies are sold wrongly or through mis-selling.
IRDAI: For most people in India, buying insurance happens across a desk, on a phone call or in a bank branch. A salesperson describes the plan, quotes a premium and slides forward the papers to sign. The buyer rarely knows what the seller earns from the sale, and the seller’s record rarely follows them from one customer to the next.
The Insurance Regulatory and Development Authority of India (IRDAI) has now put forward proposals that would change that. Its consultation paper on insurance distribution reforms says insurers should claw back commission whenever an instance of mis-selling is established. The stated aim is to make the person selling a policy financially accountable for the way it was sold.
The measures are proposals for consultation, not rules in force. The final regulations will determine how mis-selling is established and how any claw-back works in practice.
IRDAI: Salespersons to be tagged to the policies they sell
The paper also seeks to link each policy to the person who sold it. IRDAI has proposed tagging the functional identity of specified persons, salespersons and point-of-sales persons (PoSPs) of insurance distribution entities to the policies they sell. Agents or associates of insurers would be covered in the same way.
The regulator has further proposed that information on instances of mis-selling be made available in the public domain through the Public Insurance Registry. If adopted, a salesperson’s record of mis-selling could become part of the publicly available information about that person.
Also Read: IRDAI Says Its Commission Experiment Failed. Now It Wants Caps Back
IRDAI: What the paper treats as mis-selling
The consultation paper sets out a detailed suitability framework for insurers and distribution entities. For life insurance sales above a defined ticket size, insurers would have to document the customer’s needs and the suitability of the product, and maintain an audit trail.
The paper lists several practices that could attract disincentives or regulatory action. These include selling a regular-premium product as a single-premium one, failing to explain what happens if premiums stop, and not disclosing the low surrender values that can follow. Selling insurance to customers who may lack the income or circumstances to sustain the premiums is also on the list, as is presenting insurance products as fixed deposits or high-return investments.
The paper also treats promising assured returns that the product does not provide as mis-selling. So is inducing customers to surrender an existing policy and buy another on misleading claims of better returns.
IRDAI: A signature may not settle the question
The paper also addresses a common defence in disputes over sales: that the customer signed the documents. It states that mere customer consent or a signature should not absolve the insurer or intermediary of responsibility for selling an unsuitable product.
Where a customer chooses a product different from the one recommended by the suitability analysis, the paper says the reasons should be documented. The provision would be particularly relevant where insurance is pitched as an investment or savings product, a practice the regulator has specifically flagged.
IRDAI: Definition of commission to widen
On the financial side, the paper says instances of mis-selling should lead to commission claw-back by insurers. IRDAI has also proposed widening the regulatory definition of commission to include direct and indirect remuneration, covering both monetary and non-monetary incentives.
The regulator has proposed prohibiting volume-linked or reward-linked incentives for bank and NBFC staff who sell insurance. The paper cites trips, luxury gifts, milestone bonuses and contest rewards as examples of incentives that can create conflicts with customer suitability.
Taken together, the proposals would move more accountability onto the distribution side of insurance sales. The consultation paper is not yet regulation, and the final rules will decide how the framework is applied.
