Yet, the head of the branch was close to bagging a foreign trip, arranged by the bank’s insurance channel partner. After all, it had done substantial business in garnering life insurance policies.
When the banker discovered that the branch was short of just Rs 10 lakh to hit the premium target, he and an insurance agent — who presented himself as a staff of the bank — persuaded Uma Devi (name changed), 71, to redeem her fixed deposits and invest in what they described as a “noble” product that would deliver better returns.
For years, the senior citizen had been coming to the branch to withdraw cash and renew the fixed deposits her late husband had opened. Now, two of these fixed deposits were redeemed, and the proceeds were invested in a life insurance policy, requiring a yearly premium of Rs 10 lakh. No one assessed her ability to meet this commitment over the next five years.
The branch manager won a seven-day foreign tour, for “training” in the United States. Besides sightseeing, it included dining at Michelin star restaurants, with a few training sessions thrown in.
This year, when the insurance company asked for the second annual premium, a shocked Uma Devi rushed to the branch. By then, the manager had been promoted and transferred to another state. The insurance agent, who had posed as a bank staff, had joined a different insurer.
It took several visits before the branch showed her the proposal form signed by her. She realised what had happened and pleaded for reversal since her daughter’s marriage was due the next month. The branch refused. The insurance company, too, refused to own responsibility, arguing that she had signed all the documents and the formalities had been duly completed.
Ultimately, her daughter took the grievance to the Department of Financial Services (DFS) in the finance ministry. The case was shortlisted for a personal hearing by DFS Secretary M Nagaraju at his monthly review of customer complaints against banks and insurers. A day ahead of the scheduled meeting, the full amount was credited back to Uma Devi’s account, without any deduction.
Such cases are being reported from various bank branches across India.
Going by the Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2024–25, complaints categorised under Unfair Business Practices — which primarily relate to mis-selling — in the life insurance sector rose by roughly 14.3 per cent to 26,667 in FY25, up from 23,335 in FY24. As a percentage of total grievances against life insurers, complaints regarding unfair business practices increased to 22.14 per cent in FY25, up from 19.33 per cent in FY24.
IRDAI’s Bima Bharosa portal received 2,57,790 grievances in FY25, registering close to a 20 per cent rise over the year before. About 120,000 of them related to life insurance and 137,000 to general and health insurance. This portal is a gateway to register complaints with insurance companies and track their status.
In FY23, mis-selling complaints accounted for roughly one in five grievances against life insurers – disproportionately high from private-sector companies. The Council for Insurance Ombudsmen received 52,575 complaints in FY24. Set up under the Insurance Ombudsman Rules, 2017, this is an alternative platform to policyholders’ resolve grievances against insurance companies and their intermediaries, or insurance brokers.
Private grievance platforms show similar trends. One major independent platform reported a 45 per cent jump in insurance complaints between the last quarter of FY25 and the first quarter of FY26, with mis-selling emerging as a key trigger, especially in endowment and bundled policies.
The statistics do not fully capture the pain and anxiety of those who discover that their life savings have been locked into products they don’t need and/or understand. Many of these victims are widows or senior citizens placing post-retirement funds — money saved over decades by spouses who trusted the bank more than they trusted any individual agent – in these products. Almost all home loan borrowers are forced to buy bundled insurance products from the channel partner. Similarly, micro, small and medium enterprise (MSME) borrowers are compelled to invest in products offered by the lenders’ insurance partners.
Often, the bank’s senior management encourages “mis-selling” for “deeper penetration” and achieving the mission of “Insurance for All by 2047”.
The latest Economic Survey notes that assets under management (AUM) in the insurance sector touched about Rs 74.4 trillion in FY25, with premiums rising from Rs 8.3 trillion in FY21 to Rs 11.9 trillion in FY25. Life insurance continues to hold the dominant share, accounting for 91 per cent of total AUM and nearly 75 per cent of premium income. Life insurance commissions were to the tune of around Rs 60,800 crore in FY25, growing 18 per cent year-on-year, outpacing the 6.73 per cent growth in total premiums.
But the balance sheet growth masks the real challenges. Overall, insurance penetration remained stagnant at 3.7 per cent of gross domestic product (GDP) in FY25, roughly half the global average, and the life insurance segment recorded a marginal decline, falling to 2.7 per cent in FY25 from 2.8 per cent a year earlier. Meanwhile, insurance density — premium per capita — rose marginally from $95 to $97. It’s a “low-penetration, high-cost” equilibrium. Indeed, revenue from existing customers is deepening, but the system is failing to widen coverage to new households and small businesses.
One of the main reasons is the persistently high distribution and acquisition cost. The Survey warns that high distribution costs erode value for policyholders and keep premiums unaffordable for large sections of the population. Private life insurers are seeing margins squeezed; net profits stagnate despite strong topline growth because acquisition expenses are rising sharply. Without rationalising these costs, the sector cannot realise the “Insurance for All” dream by 2047.
In simple words, premiums remain high not only because of risk pricing, but also because too much of the first-year premium is still absorbed by commissions, incentives, and expensive multi-layered distribution chains.
Effective April 1, 2023, the IRDAI (Payment of Commission) Regulations, 2023 and Expenses of Management (EoM) Regulations, 2023, liberalised the commission framework – shifting from rigid product-wise commission caps to a company-level cap on overall expenses of management. In the new regime, the insurers can design their own commission structures, provided total commissions and other expenses remain within prescribed EoM limits.
IRDAI went a step further and consolidated these rules into the IRDAI (Expenses of Management, including Commission of Insurers) Regulations, 2024, simplifying compliance but retaining the core principle that boards have discretion on commission design within an overall EoM ceiling (30 per cent for general insurance and 35 per cent for health insurance).
While the intent is to give insurers flexibility and encourage innovation, the rising complaints suggest that distribution costs and mis-selling have not diminished. In fact, liberalised commissions, combined with intense sales targets, can make bancassurance an even more aggressive channel if the boards of regulated entities do not exercise restraint and bank managements continue to link staff rewards and incentives to third-party income. IRDAI is expected to introduce new commission regulation by September 2026, aiming to balance affordability, cost discipline and industry sustainability.
Bancassurance is a relationship between a bank and an insurance company for selling insurance products to a bank’s customers. In this partnership, bank staff and tellers become the point of sale and point of contact for the customer. The customers who visit the branches for basic banking services, particularly rural and semi-urban branches, are systematically nudged or pushed into buying complex financial products they neither need nor understand.
This is the backdrop of the Reserve Bank of India’s recent draft amendment directions on sales and marketing of financial products. Mis-selling is not an aberration but a structural byproduct of the current incentive architecture in most banks. They need to finetune it if they want to enjoy customers’ trust – the cornerstone of the business of banking.
