‘Only 48% of life policies are renewed for over 5 years’

IRDAI is tightening action against mis-selling, with penalties linked to the severity of violations and harm caused. Its proposed distribution and commission reforms aim to remove incentives for mis-selling. In an interview with TOI, chairman Ajay Seth explains the changes. Excerpts:What is the intent behind the consultation paper on distribution; is it to stop mis-sellingThe intent is fourfold: expanding coverage, improving affordability, enhancing accessibility, especially in underserved areas and economic segments, and generating employment. The specific objectives are to remove regulatory arbitrage, bring more entities and persons into distribution, make the sector cost-efficient, incentivise good market conduct and enhance transparency. Addressing mis-selling is integral to this, but it is not the only driver. If you look at the structure, high upfront commission on first-year premium induces mis-selling and a high proportion of surrenders; only about 48% of life policies reach the 61st month. In credit life, a low- or nil-effort product, single-premium commissions have ranged from 22% to 57%, often alongside compulsory bundling with loans. The reforms link remuneration to effort, reward persistency, end compulsory bundling and make conduct visible through the Public Insurance Registry.Will it fully address the problem given that other competing financial products offer much lower commission?No single measure will address it fully, which is why the reforms are a package. In 2009, mutual funds changed because several things came together: distribution reforms, market infrastructure and changes in how the industry functioned. We are approaching insurance in a similarly comprehensive manner. The reforms rationalise overall expenses of management, of which commission is one part, so insurers must become efficient in both distribution and operations. Alongside, there is suitability as a real obligation; traceability of every sale to the person who solicited it; commission clawback where mis-selling is established; curbs on compulsory bundling; public disclosure of conduct through the Public Insurance Registry.The industry warns that the new norms could slow business and threaten livelihoods…Discussion is welcome but the status quo is not serving the sector either: premiums have only tracked GDP, not outpaced it, which is the need, and the number of policies has not grown enough. Livelihoods in distribution depend on how many people can enter and earn, not on how high commission rates are. The reforms widen that base through lower capital and fees, permanent registration, additional commission for smaller towns and rural areas, and freedom to sell other financial and non-financial products. Agents in closed architecture get relatively higher limits, and stronger renewal commissions let them build a lasting book of customers. As trust grows, insurance becomes easier to sell.Corporate-focused brokers argue that commission caps could undermine investments and threaten cost recovery, while the General Insurance Council cites low non-life insurance margins and smaller players fear larger insurers will benefit. How do you respond?We will consider every submission backed by sound reasoning. On corporate broking, the proposal provides for disclosure of commission on commercial policies with sum insured above Rs 50 crore. Fee-based risk management advisory can be an alternative model for brokers who add specialised value. On margins, low profitability is not an argument for higher distribution costs and that too at the cost of the policyholder. The effort should always be oriented towards enhancing policyholder value and improving service. We have proposed the EoM level at which the sector was operating in the recent past. Recovering efficiency is how margins improve. On size, commission caps benefit all players — new and small included. They remove the leeway larger insurers have to outbid others for distribution, so insurers compete on products, pricing and service, and distribution networks are not poached by the highest bidder. New companies will continue to get flexibility in their first five years.General insurers have proposed a mandatory co-pay on health insurance. Will that not be unfair for customers willing to pay for a high sum insured and will it not defeat the purpose of buying insurance to avoid keeping an emergency health fund?We have not yet received any such proposal. When it is proposed by the industry players, we will examine the suggestion. Co-payment has a role when the customer chooses it in exchange for a lower premium, and such options already exist. But the purpose of health insurance is financial protection at the time of need. Any design that shifts costs to policyholders must be weighed against that purpose, especially for those willing to pay for higher cover. Before the burden moves to customers, the system’s own inefficiencies need attention. In some cases, insurers pay only around Rs 67 in claims for every Rs 100 of premium, and distribution and operating costs have risen sharply. That is where the first correction must come. Product design will be taken up comprehensively in the product reforms planned for FY28.