New Delhi: India’s insurance regulator is planning a sweeping overhaul of how policies are sold, including tighter scrutiny of banks and a discussion paper on distribution reforms, as it looks to curb mis-selling and high costs in the sector.
In an interview on Tuesday, Insurance Regulatory and Development Authority of India (Irdai) chairman Ajay Seth said that the next phase of insurance reforms will focus less on headline liberalization and more on fixing structural inefficiencies in pricing, distribution and customer outcomes.
Irdai is also working with the Reserve Bank of India (RBI) to tighten oversight of banks selling insurance products, while pushing for a lower-cost and more transparent model.
“We are coordinating with the RBI to curb mis-selling through the bancassurance channel. In addition, we are also working towards a wide-ranging distribution reform. We plan to bring out a discussion paper in about six weeks,” Seth said.
Irdai’s primary concerns include mis-selling, high costs and low insurance coverage. Seth said pricing and commissions should reflect how complex a product is, how it is sold, and the effort involved, rather than following a uniform, high-cost model.
According to the Economic Survey for 2025-26, insurance penetration has declined to 3.7% from 4% a year ago. The sector has been successful in ‘deepening’ revenue from existing customers, but high distribution costs are preventing a ‘widening’ of the risk pool, the Survey said.
Seth cited observations by the RBI and the Economic Survey that the insurance sector must transition from “high-cost and low-inclusion” to “affordable-cost, broad inclusion and high quality”.
The Survey noted that the insurance sector “remains constrained by a ‘low-penetration, high-cost’ equilibrium driven by a high-cost distribution model that has inflated the cost of protection, structurally limiting the sector’s reach despite its robust solvency and balance sheet strength. The path forward necessitates decisive shifts. Insurers must prioritize the digitization of distribution to rationalize acquisition costs and restore ‘value for money’ to the policyholder.”
Seth acknowledged that recent regulatory changes, including tighter surrender value norms, have not fully corrected these distortions.
These norms, introduced in 2023, require insurers to offer higher guaranteed surrender values and ensure a meaningful payout even if a policyholder exits in the early years of a policy.
“The surrender value stipulation was meant for nudging insurers to work for preserving value for policyholders even in the first year. The outcome of the expense-related change has not been on expected lines. With a few exceptions, the sector has moved to a high-cost structure and that needs to be addressed,” Seth said.
Mis-selling insurance
Mis-selling is a key focus of the reform agenda. A government response to a question in the Rajya Sabha on 17 March indicated a 14% rise in complaints of unfair business practices — including mis-selling — to 26,667 in FY25 from 23,335 in FY24, accounting for more than 10% of all insurance grievances received through Irdai’s Bima Bharosa platform.
Mis-selling involves the sale of insurance products to consumers without proper disclosure of terms, conditions or suitability.
Finance minister Nirmala Sitharaman warned banks on 23 February against mis-selling insurance and other financial products, and advised them to instead focus on their core business.
Seth said Irdai’s approach is premised on much higher levels of transparency, minimization of non-compliance with rules and regulations, subject to maximum facilitation of economic activity, and improved corporate governance.
Improvements, not shocks
Responding to concerns over recent turbulence in the sector, Seth said there had indeed been “multiple shocks in the past few years in the form of tax, change in policies related to expense ratios, surrender charges besides the pandemic”, but emphasized that “all recent changes have been in favour of the sector and not shocks for them”.
He noted that GST exemption on retail life and health insurance policies from September 2025 “has helped hugely in enhancing affordability of insurance and increasing the coverage and segmental growth” while changes in expense ratios “were aimed at providing flexibility to insurers in managing their operations and becoming efficient”.
While the GST Council decided to fully exempt all individual (retail) life and health insurance policies from the goods and services tax, group insurance policies (including employer-sponsored and group credit life/term plans) continue to attract 18% GST.
The reforms planned will be significant for India’s insurance sector, which collected ₹11.93 trillion in premium income and managed assets of about ₹74.4 trillion in FY25, according to Irdai’s annual report 2024-25.
Life insurers collected ₹8.86 trillion, or 74% of premium income (registering a growth of 6.73%) and accounted for 91% of total assets under management (AUM). Within the non-life segment, health insurance contributed 41% of gross domestic premium, surpassing motor insurance to become the largest line of business.