Insurance distributors and salespersons could face a direct financial consequence for mis-selling policies if proposed changes to insurance distribution rules are implemented. According to a report by Kotak Institutional Equities, the proposed framework could introduce commission claw-backs for policies found to have been mis-sold while also making it easier to identify the individual responsible for a sale.
The brokerage said the proposed rules would place greater emphasis on proving that an insurance product was suitable for the customer. For life insurance policies above a specified ticket size, sellers could be required to maintain documented evidence of the customer’s needs and the suitability assessment carried out before the policy was sold.
“Documented needs and suitability analysis becomes mandatory for sales by life insurers above a defined ticket size, and customer consent will not absolve responsibility for an unsuitable sale,” the report said.
One of the key proposed changes is the introduction of a financial consequence for mis-selling. If a policy is found to have been sold improperly, the commission earned from that sale could be clawed back.
The proposed framework would also link each insurance policy to the functional identity of the person who sold it. This could create a clearer trail of accountability by making it possible to identify the individual associated with a particular policy.
According to the Kotak report, cases involving mis-selling could also become part of the concerned person’s performance record and may be placed in the public domain.
Proposed Rules List 12 Mis-Selling Scenarios
The framework reportedly sets out 12 specific examples of conduct that could qualify as mis-selling. These include situations where customers are sold non-participating insurance products as alternatives to bank deposits.
The proposed examples also cover the sale of unit-linked insurance plans (ULIPs) to customers who are risk-averse or beyond their working years. Selling regular-premium policies to individuals who do not have a stable income is another example cited in the report.
Life insurance products sold primarily for inheritance planning have also been included among the scenarios outlined by Kotak.
New Limits On Insurance Sales Incentives
The proposed framework could also alter the way insurance sales incentives work across banks and non-banking financial companies (NBFCs).
Under the proposed measures, employees of banks and NBFCs involved in insurance distribution would not be permitted to receive incentives linked to sales volumes or rewards. The restriction would cover both monetary and non-monetary benefits.
Another proposed change concerns the flow of premium payments. Premiums would need to be transferred directly from the customer’s own bank account to the insurer. Third-party payments would not be permitted, except through Bima-ASBA.
Insurance Commissions And Distribution Costs Under Lens
The proposals come amid broader scrutiny of insurance distribution costs and the incentives influencing sales. Kotak noted that insurance payouts have increased faster than premiums in certain distribution channels.
Among the sampled life corporate agents, new business premium increased 1.3 times, rising from Rs 630 billion in FY2023 to Rs 800 billion in FY2025. Over the same period, remuneration grew 2.3 times, from Rs 96 billion to Rs 216 billion.
The proposed framework seeks to address such concerns by strengthening oversight of distribution practices and bringing greater transparency to commissions and incentives.
Customers To Get More Product Information
The proposed changes also contain measures aimed at giving customers greater access to insurance product information before they make a purchase.
Dark patterns would be prohibited, while insurers would have to make product features, pricing information and claims performance accessible without requiring customers to submit personal details first.
Insurers and large distribution entities would also be required to publish their commission policies on their websites. For policies with cover exceeding Rs 500 million, commission details would have to be disclosed on the policy itself.
