IRDAI wants to change how insurance is sold

Saad (0:00)

Hello folks, you're tuned in to Finshots Daily. I'm Saad, if you're new here, welcome. If you're returning, welcome back. In today's episode, we break down the IRDAI's new consultation paper that could change the dynamics of the insurance industry and how insurance is sold in India.

Just a heads up though, this episode is going to be a little longer than our usual ones. It's major news.

For however long you've been reading Finshots, you probably know that we have a product called Ditto. It's an insurance platform that provides free advice on health and term insurance through knowledgeable as well as IIDAI certified advisors. And if somebody wants to then buy insurance from us, they can do so too. We help you through the purchase and also whenever you need us during a claim. The main idea is to be spam free and not be pushy with insurance sales like you may have seen otherwise. So if you set up a call with our advisors, no one will call you again to bother you to buy insurance or follow up unless you specifically want us to. Now you might think that this is part of a plug or an ad before we start the story, right?

It's not. It's actually to set up the context of this story and tell you what Ditto Insurance does because actually last week, the IRDAI, the insurance regulator, dropped a bit of a bombshell on us and other insurance distributors like us. It released a consultation paper proposing a bunch of reforms that could change how insurance is sold in India. If these proposals eventually become law, they could cap commissions made to distributors, stop banks from compulsorily bundling insurance with loans and other products, and limit how much insurers can spend on things like commissions and operating expenses. Now, this means that for a company like us, revenues could drop because what the regulator is essentially saying is that if an insurer like say HDFC or ICICI gets premiums from customers like you, it would have to share a smaller portion of it with insurance distributors and agents as commissions. And since that's how we make money, it's obviously a problem. Which is also why you've seen stocks of companies like Policy Bazaar and Total Mint, our listed peers, fall by as much as 30% or even more over the last few days. Now, as much as it affects us, Irdai's intentions aren't all wrong, if anything, they're actually good. Because you see, insurance penetration or the percentage of premiums to a nation's GDP in India is a measly 3.7% compared to a global average of 7.3%.

As you know, India wants to have an adequate life, health and property cover by 2047, the year in which we celebrate the centenary of our independence.

But to get there, there is a problem. Even if insurance penetration in India is low, a lot of whatever penetration we do have is in fact, misselling. Well, the Irdai has it documented. Its annual report suggests that in FY25 alone, there were more than 26,600 complaints of insurance, misselling and unfair business practices. That's a 14% rise in cases from the previous year. And one of the few reasons why this misselling happens lies in how insurance is sold in India. Insurers don't sell most policies directly to consumers. They rely on a huge network of intermediaries, like individual agents, corporate agents like us, banks, brokers, web aggregators, and even car dealers who sell motor insurance when you buy a vehicle. And the way these distributors were paid changed around 2023 and the year after that. Before that, Irdai had separate commission caps for different insurance products. But in 2023, it scrapped these product-wise limits and introduced a broader ceiling called Expenses of Management or EOM. Essentially, insurers got more freedom to decide how much they wanted to pay distributors for different products, as long as their overall expenses as a percentage of premiums stayed within the prescribed limit. The idea was to simply give insurers more freedom to decide how they spend their money and let competition and efficiency eventually benefit customers.

But things didn't quite work out that way. Insurers began competing aggressively for distributors by offering higher commissions on products that were more profitable.

Some even breached the expense limits they were allowed, and that created an obvious incentive problem. Take banks, for example. They have a massive customer base, and are therefore a very powerful channel for selling insurance. If an insurer is willing to pay a high commission, there's a strong incentive to push that product through the bank's network. And that's also where mis-selling can creep in. Imagine you take a home loan. You may genuinely want life insurance, so your family isn't left with a loan if something happens to you. But the problem starts when you're made to believe that buying a particular insurance policy is necessary to get the loan, even when it isn't suitable for you. Now, banks aren't the only channel where this can happen. We're using them as an example, simply because they're such a large distribution network. But IRDAI has been watching all of this closely, and also warning the industry about this for a while. It had essentially said that if insurers didn't pass on the benefits of the more flexible system to customers, it could bring back stricter commission limits. And that's essentially what this consultation paper is trying to do. It has five big changes being proposed. To begin with, it wants to simplify the distribution system. Instead of having separate rules for agents, brokers, corporate agents, web aggregators, and other intermediaries, IRDAI wants to group them into three broader categories.