New Delhi, Oct. 3 -- "Sir, you should seriously consider this." That was how the conversation began. And it was not unusual. A customer had walked into his bank to discuss his financials. He had some savings, a few investments and a family to take care of. The relationship manager (RM) knew enough about him to make the conversation sound personal.
They suddenly discussed an insurance policy. Charts. Tax benefits. Projected returns. Numbers that were reassuring. There was even a story about financial security, another about what would happen to the family if something happened to him. The customer listened. He trusted the RM. He signed. The premium was debited. The policy was issued. The RM congratulated him.
But soon, the RM stopped taking calls. The next time the customer had a question, he discovered that his new best friend the RM was not interested in listening to him. This story may not describe every insurance sale in India. It does, however, describe the question now hanging over the industry: "Are we selling insurance because people need protection. Or because somebody needs to sell a product?"
Insurance is unlike most financial products. A customer can buy a policy today and discover its real value years later, perhaps when illness strikes, an accident occurs or a family loses its principal earner. But the person selling it, our friend the RM, has been rewarded on the day the policy was sold.
That is where the trouble begins.
Follow the Money
The Insurance Regulatory and Development Authority of India (IRDAI) has now proposed a significant overhaul of the economics of insurance distribution. Its September consultation paper has proposed product- and channel-specific limits on commissions, tighter overall expense limits for insurers and a restructuring of how distributors are rewarded.
For several products, first-year commissions would be vastly lower than levels currently prevailing. For instance, in individual health insurance, the proposal puts first-year commissions at 15 per cent for distribution entities and 20 per cent for agents, with lower renewal commissions. For longer-term life policies, the proposed first-year limits are also lower than existing commissions, while remuneration would be spread across the policy term. The regulator has also proposed safeguards against the compulsory bundling of insurance with loans and credit.
That last part is very interesting. Walk into a bank for a loan and the customer may naturally expect to discuss the loan. But nearly unseen, insurance may enter the conversation, because the economics of selling it can be attractive. That creates an itchy outcome: An RM may begin seeing a customer not as a person seeking financial advice, but as a potential source of insurance revenue. And commissions.
This does not mean every banker is doing it. Nor does it mean every insurance policy sold through a bank is unsuitable. It just means that incentives matter. A lot. If a product pays far more for being sold today than for being properly serviced over the years, the system can encourage selling. And once selling becomes the priority, advice can become secondary.
The IRDAI's proposed reforms are, in part, an attempt to correct that imbalance.
When Silence Comes
The caveat with insurance is that the customer discovers the quality of the sale only much later. Other financial instruments are different. A mutual fund statement arrives. A fixed deposit matures. A stock can be sold. But insurance is different. The customer buys a promise. And promises, by definition, are tested only when something goes wrong.
That is particularly so in health insurance. A family can spend years paying premiums without making a claim. Then comes a hospital admission, after an accident or a sudden illness. The family is no longer sitting across a desk discussing tax deductions and future returns. It is sitting outside a hospital room. That is when exclusions, waiting periods, sub-limits, documentation and definitions suddenly acquire a very different meaning.
IRDAI's data show that general and health insurers together received 137,361 grievances in FY 2024-25. The figure was 41 per cent higher than the previous year, with claims-related issues forming a major part of the complaints. By itself, the existence of complaints does not mean insurers routinely reject legitimate claims. Nor should every disputed claim be treated as evidence of wrongdoing.
But the sheer importance of the claims process is impossible to ignore. Insurance is ultimately judged at the hospital accounts department, not the sales counter. That is where the industry's trust problem becomes a deciding factor.
Customer Pays Twice
There is another irony. High distribution costs can raise the economics of selling a policy. But reducing commissions does not mean the customer will receive a cheaper or better product.
The industry has a legitimate argument. Agents do real work. They acquire customers, explain complex products, service policies and remain the bridge between insurers and customers, who may otherwise have little understanding of insurance. The industry, thus, has argued that reductions in commissions could weaken distribution, particularly in small towns and rural areas where personal selling remains important. Insurers and intermediaries have also sought a phased implementation of the proposed changes. That argument deserves to be heard. For India cannot solve its insurance problem by making it unattractive to sell insurance. The country needs more insurance, not less.
The Government's own data shows why. India's overall insurance penetration was 3.7 per cent in 2024-25, with life insurance at 2.7 per cent and non-life at 1 per cent. Insurance density rose to $97 (Rs 9,346). The challenge, therefore, is not merely to reduce the commission bill. It is to change the way the industry rewards.
If a salesman earns for bringing in a customer, some part of that reward should depend on the policy remaining active, being properly serviced and the customer continuing to find value in it. If an agent disappears after the first premium, the system has rewarded acquisition, while neglecting ownership.
That is not merely a commission problem. It is a design problem.
The Foreign Investor
Welcome to the investor dichotomy. India has spent years trying to make its insurance market more attractive. In February 2025, the Government announced that the foreign direct investment limit in insurance would rise from 74 per cent to 100 per cent. Parliament passed the 'Sabka Bima, Sabki Raksha' legislation, saying the move would attract capital, technology and global best practices.
That is a significant opening of the door. But investors do not enter a market because the door is open. They also look at the economics inside the room. IRDAI's commission reforms have raised concerns among insurers, intermediaries and investors, and the impact they foresee has prompted concern. Enough concern to make them dissect the economics of distribution, acquisition and servicing.
The dissection is not the problem. The issue is whether India can create an insurance market in which profitability and policyholder value reinforce each other, not pull in opposite directions.
What of the Policy?
It is good that the Government opened up the insurance sector. Competition improves products. Capital brings technology. Foreign participation brings global practices. But none can substitute for something much simpler: Trust. That is why the authorities moved in 2025 to protect the policyholder.
But regulation cannot do everything. Insurers must decide whether distributors are rewarded for selling policies or building relationships. Banks must decide whether their RMs are financial advisers first or salesmen first. And customers, too, must learn to ask harder questions before signing.
The industry, meanwhile, has to accept a rather inconvenient truth: the insurance business does not end when the policy is sold. That is when the real relationship begins.
Because someday, the customer will need to know whether he bought insurance, or just a document that looked like protection. And that is what the industry must remember. Why did the customer buy the policy in the first place? He did not buy a sales pitch. He did not buy a commission. He did not buy a bank's financial target. He bought protection. Against the odds.
Published by HT Digital Content Services with permission from Millennium Post.