Proposed changes to insurance distribution rules in India could make mis-selling more financially costly for sellers by introducing commission claw-backs and tighter accountability for individual policies, according to an analysis by Kotak Institutional Equities.
The proposed framework would require insurers and distributors to identify and track the person responsible for selling each policy. This could create a clearer link between individual sales practices and subsequent complaints or findings of unsuitable selling.
For life insurance policies above a specified ticket size, insurers would also be required to document the customer’s needs and carry out a suitability assessment before completing the sale. The proposal makes clear that obtaining a customer’s consent would not, by itself, remove the seller’s responsibility if the policy is subsequently found to be unsuitable.
Under the proposed system, a finding of mis-selling could result in the commission paid on the policy being recovered from the seller. Each policy would be linked to the functional identity of the individual who sold it. Cases of mis-selling could also become part of that person’s performance record and, under the proposal, may be placed in the public domain.
The framework sets out 12 specific illustrations of practices that could amount to mis-selling. These include presenting non-participating insurance products as alternatives to bank deposits, offering unit-linked insurance plans, or ULIPs, to customers who are unwilling to take investment risk or are beyond working age, and selling regular-premium policies to people without a stable income.
Selling life insurance products primarily for inheritance planning is another example identified in the proposed framework. The examples are intended to provide greater clarity over circumstances in which the interests or financial circumstances of customers may not be properly matched with the insurance product being offered.
The proposed measures form part of broader changes aimed at strengthening suitability, transparency and accountability in insurance distribution. They also address concerns surrounding the cost of distribution and the incentives offered to individuals and institutions involved in selling insurance products.
Data cited in the analysis indicates that remuneration in some distribution channels has grown considerably faster than new business premiums. Among the sampled life insurance corporate agents, new business premiums increased from Rs 630 billion in FY2023 to Rs 800 billion in FY2025, representing a 1.3-fold rise. Over the same period, remuneration increased from Rs 96 billion to Rs 216 billion, a 2.3-fold increase.
The proposed rules would also place restrictions on incentives for bank and non-banking financial company staff involved in insurance sales. Volume-linked and reward-linked incentives, whether monetary or non-monetary, would not be permitted under the proposed framework.
Another proposed safeguard concerns the movement of premiums. Customers would generally be required to make premium payments directly from their own accounts to the insurer. Third-party payments would not be allowed, except through the Bima-ASBA mechanism specified in the proposal.
The consultation paper also addresses the way insurance products are presented to customers online. It proposes restrictions on so-called dark patterns, or digital interface practices that can steer users towards particular choices. Customers would also be able to access information on product features, pricing and claims performance without having to provide personal details first.
Transparency over commissions is another element of the proposed changes. Insurers and large distribution entities would be required to publish their commission policies, while commission details would have to be disclosed for policies carrying cover of more than Rs 500 million.
The proposals, contained in a consultation paper released late on Wednesday, also seek to reintroduce commission caps across life, health and motor insurance. As the measures remain proposals at this stage, their final form will depend on the regulatory process and feedback received during consultation.
If implemented substantially as proposed, the framework would place greater emphasis on matching insurance products with customers’ needs while creating a clearer financial and professional consequence for unsuitable sales.
