The Insurance Regulatory and Development Authority of India (IRDAI) has formed a committee to review distribution compensation in the insurance industry amid mounting concerns over surging commission costs in FY25. The regulatory scrutiny comes less than two years after IRDAI scrapped product-wise commission caps, with rising distribution costs now inflating premiums across the sector.

Life Insurance Sector Faces Widespread Expense Breaches

The life insurance segment witnessed significant expense limit violations in FY25, with regulatory compliance becoming a major concern for the industry.

Total gross expenses of management in life insurance rose to ₹1.38 lakh crore in FY25, representing approximately 15.60% of total gross premium. Commission payouts increased 18% to ₹60,800.00 crore, significantly outpacing premium growth of 6.73%, highlighting the industry's continued reliance on commission-led distribution.

Non-Life Insurance Sector Seeks Regulatory Forbearance

The general insurance space faced similar challenges, with 15 non-life insurers breaching expenses of management limits and seeking regulatory forbearance, which IRDAI has indicated is under examination in its annual report.

While aggregate operating costs moderated marginally, commission payouts remained elevated relative to premium growth across the non-life insurance sector.

Regulatory Framework Under Review

Under the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, insurers are required to operate within expense caps linked to product structure, premium-paying term, and duration of business. Industry sources indicate that discussions are underway regarding whether commission ceilings should be reinstated.

Industry executives emphasize that the discussion focuses on designing a new framework rather than reverting to the earlier regime. They argue that returning to product-wise commission caps would be counterproductive given changes in product design, persistency norms, and distribution economics.

Industry Concerns Over Mis-selling Correlation

Data reveals a positive correlation between high first-year commissions and mis-selling complaints in the first policy year. While insurers acknowledge that reasonable commissions are necessary to improve insurance penetration, industry executives warn that overpaying distributors encourages aggressive sales practices, ultimately benefiting intermediaries while policyholders and insurers bear long-term costs.

The regulatory review reflects broader concerns about balancing distribution incentives with consumer protection and market stability as the insurance sector continues to evolve.

The Insurance Regulatory and Development Authority of India (IRDAI) has flagged a significant increase in complaints related to unfair business practices in the insurance sector during FY25, even as overall grievances remained largely unchanged. The development highlights growing concerns about mis-selling and misleading sales practices affecting policyholders across the industry.

Surge in Unfair Business Practice Complaints

According to the IRDAI Annual Report 2024-25, complaints categorised under unfair business practices (UFBP) witnessed a notable increase during the fiscal year. The data reveals a concerning trend in consumer protection issues within the insurance sector.

The regulator noted that unfair business practice complaints now account for over 22% of total grievances, marking a significant increase from their previous share. This category primarily encompasses issues related to product suitability, misleading disclosures, and sales practices that do not align with policyholder needs.

Key Areas of Concern

The IRDAI report identified several specific issues driving the increase in unfair business practice complaints:

• Product Suitability: Instances where insurance products were sold without proper assessment of customer needs
• Misleading Disclosures: Cases involving inadequate or deceptive information provided during the sales process
• Inappropriate Sales Practices: Methods that prioritised sales targets over policyholder interests

Life insurance continued to account for a significant portion of such complaints, indicating systemic issues within this segment that require regulatory attention.

Grievance Resolution and Regulatory Response

Despite the increase in complaint volumes, IRDAI reported that most unfair business practice-related grievances were resolved during the year. The regulator noted that complaint outcomes varied, with some cases decided in favour of policyholders, others partially upheld, and some rejected after thorough review.

The regulator has emphasised that insurers must maintain robust internal grievance redressal mechanisms and dedicated committees to monitor claims and policyholder complaints. IRDAI has also issued warnings against misleading sales practices and stressed the importance of conducting root-cause analysis to prevent repeat grievances.

Regulatory Oversight and Consumer Protection

The increase in unfair business practice complaints has raised concerns from a consumer protection perspective, prompting IRDAI to reinforce its oversight measures. The regulator continues to monitor the situation closely and has called for enhanced compliance measures across the insurance industry.

The data underscores the ongoing challenges in ensuring ethical sales practices within the insurance sector, despite regulatory efforts to strengthen consumer protection frameworks. The trend suggests that while overall grievance volumes remain stable, the nature and complexity of complaints are evolving, requiring targeted interventions to address systemic issues in sales and disclosure practices.