Concerned about the rising number of complaints over unfair sales practices in India’s insurance sector, the regulator is planning a major clean-up of how life, health and motor vehicle policies are sold by bringing out a discussion paper on proposed distribution reforms.
The next phase of insurance reforms will focus less on headline liberalization and more on fixing structural inefficiencies in pricing, distribution and customer outcomes, Insurance Regulatory and Development Authority of India chairman Ajay Seth said in an interview. IRDAI is also working with the Reserve Bank of India to tighten oversight of banks selling insurance products while pushing for a lower-cost and more transparent model, he said.
“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 on Tuesday.
The primary concerns of the insurance regulator pertain to mis-selling of insurance, elevated cost structures and limited inclusion. Seth said cost structures should be aligned with the discretionary or essential nature of insurance products, their complexity, distribution channels and the effort involved in selling them.
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. Within the non-life segment,contributed 41% of gross domestic premium, surpassing motor insurance to become the largest line of business.
The number of complaints classified as unfair business practices, including mis-selling, rose to 26,667 in FY25 from 23,335 in FY24 and accounted for more than 10% of all insurance grievances received through IRDAI’s Bima Bharosa platform, the government told the Rajya Sabha in response to a question on 17 March.
Mis-selling insurance
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.
Responding to concerns over the turbulence faced by the insurance sector in recent years, 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.”
Seth noted that 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.
Seth pointed to observations in reports by the RBI and the government’s Economic Survey that the must transition from “high-cost and low-inclusion” to “affordable-cost, broad inclusion and high quality.”
“The most visible implication of the high-cost regime is the widening divergence between insurance coverage depth and breadth,” the Economic Survey for 2025-26 noted.
Insurance penetration
While insurance density has risen steadily in FY25, reflecting higher spending by households already integrated into the financial system, insurance penetration has stagnated and declined to 3.7%, it said. The sector has been successful in ‘deepening’ revenue from existing customers, but high distribution costs are preventing a ‘widening’ of the risk pool.
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,” the Economic Survey said.
Seth acknowledged that the surrender value stipulation has not had the desired effect. Surrender value is the amount that an insurance company pays to a policyholder who decides to terminate a plan before maturity.
“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,” said Seth.