Why India’s Insurance Sector Needs a Shift From High-Commission Push to Pull Model
India’s long-standing reliance on high distributor commissions to drive life and health insurance sales has resulted in stagnant penetration and a surge in consumer grievances. Transitioning the domestic insurance ecosystem from an aggressive push model to a consumer-driven pull marketplace is necessary to ensure products are suitable, transparent, and built to solve policyholder needs.
What Happened
For decades, the insurance sector operated on the assumption that life and medical covers require hefty commissions to persuade reluctant buyers. However, recent data indicates that this distribution structure has failed to expand market reach while generating substantial friction for consumers.
In FY25, life insurance penetration declined from 2.8% to 2.7% over the previous year, while non-life insurance penetration remained unchanged at 1%. Despite this stagnancy, life insurance companies increased their commission payouts by 18% in FY25, even as overall premium revenue grew by only 6.7%. First-year premiums, which yield the highest distributor commissions, climbed by 40%, while renewal commission growth stood at just 9%. In the private individual health insurance segment, commission costs hover around 25%.
At the same time, consumer dissatisfaction has escalated. Complaints regarding mis-selling in the life insurance sector rose by over 14% in FY25. For general and health insurers, consumer complaints jumped by 45%, with more than two-thirds of those disputes directly connected to claims. This pattern reflects an incentive structure that prioritises closing transactions over policyholder suitability or claim fulfilment.
Key Highlights
- Declining and Flat Penetration: Life insurance penetration fell to 2.7% in FY25 from 2.8%, while non-life penetration stayed static at 1%.
- Commission Outpacing Premium: Life insurers paid 18% more in commissions in FY25 against premium growth of 6.7%, driven by a 40% jump in high-commission first-year premiums.
- Surge in Grievances: Life insurance mis-selling complaints climbed by over 14%, while general and health insurance disputes surged by 45%, mostly concerning claims.
- Five Essential Steps: Transitioning to a pull marketplace requires eliminating opaque terms, conducting underwriting at the point of sale rather than claim, making sellers responsible for suitability and claim support, providing clear upfront disclosures, and enabling consumer ratings for agents, insurers, hospitals, and third-party administrators (TPAs).
- Upcoming Regulatory Tagging: The Insurance Regulatory and Development Authority of India (IRDAI) will mandate that, starting January 1, 2027, every policy be digitally linked to the individual seller to establish accountability.
Why This Matters
For middle-class households without the security of state pensions or medical provisions, insurance functions as an indispensable financial safety net. Yet, confusing product design, high costs, and misaligned distribution incentives make finding an appropriate plan difficult.
Underwriting frequently occurs at the point of claim rather than during the initial purchase, leading to denied claims, disputes, and diminished consumer trust. Furthermore, agents often operate without legal or financial accountability once a policy is sold, leaving buyers unassisted when seeking payouts.
Similar systemic reforms previously reshaped India’s mutual fund landscape. Regulators spent more than 15 years refining mutual fund products for everyday investors before consumer awareness campaigns helped sustain over 20% annual asset growth for a decade. Implementing comparable accountability and clarity in insurance could establish life and health cover as essential precursors to broader financial investments.
What to Watch Next
Beginning January 1, 2027, IRDAI will require every insurance policy to be directly tagged to the specific individual who conducted the sale, rather than just the partner bank or corporate entity. This digital trail is planned as a mechanism to enable big data tracking to identify and remove errant sellers from the sector.
Additional steps required for a complete shift include restructuring products to remove hidden traps, requiring distributors to assist with claim settlements, standardising transparent disclosures using technology, and establishing customer review mechanisms across agents, insurers, TPAs, and hospitals.
Frequently Asked Questions
Why are insurance mis-selling complaints rising in India?
Complaints are climbing because distribution networks are incentivised by large upfront commissions, such as the 40% rise in first-year premium commissions in FY25, prompting sellers to focus on closing sales rather than ensuring product suitability or claim viability.
What regulatory change takes effect on January 1, 2027?
Starting January 1, 2027, IRDAI will mandate that every policy sold be tagged to the individual person who made the sale, creating a traceable digital record to hold sellers accountable.
Why should underwriting be conducted at the point of sale?
Conducting medical and risk underwriting at the point of sale establishes coverage terms, exclusions, and proposal acceptance before premiums are accepted, preventing sudden claim rejections and disputes later.
Source: Analysis based on industry data and regulatory perspectives published by the Hindustan Times.