3 days ago
To curb mis-selling, finance ministry tells lenders to stop incentives on insurance
The rampant mis-selling of unnecessary insurance plans to loan and deposit customers by lenders has already evoked concerns among the two sector regulators. Now, the finance ministry has asked banks and non-banks to stop offering incentives on insurance sales to eliminate this malpractice.
As lenders link employee performance and incentives to selling insurance products, the ministry's department of financial services (DFS) has issued specific instructions, asking lenders to immediately review their marketing practices, according to two people aware of the development, speaking on the condition of anonymity. The DFS has told financial institutions that insurance plans should only be sold as per the customer's requirements, and sales targets should not be linked to incentives, the people said.
The ministry directed banks that their core banking services should not be forcibly linked to insurance products, advising them to promote financial literacy among customers and employees for the healthy development of India's insurance market, the first person quoted earlier said.
Queries emailed to the finance ministry and the financial services secretary remained unanswered till press time.
The Insurance Regulatory and Development Authority of India and the Reserve Bank of India (RBI) have flagged concerns about such mis-selling by banks and non-banking financial services companies (NBFCs). Lenders bundle insurance plans with products like housing loans and locker facilities. At times, customers are even unaware of the terms.
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Mis-selling can be deliberate by an insurer or its agent or any intermediary, or a result of poor training of the salesperson, according to Hari Radhakrishnan, sector expert at Insurance Brokers Association of India (IBAI).
'As regards deliberate mis-selling, there should be deterrents or disincentives in place, such as regulator action by way of fines or penalties or de-licensing in egregious cases. Incentive structures that promote mis-selling, such as hard pressure-based selling, compulsive selling, etc., must be removed or discouraged," Radhakrishnan said. 'Non-deliberate mis-selling can be addressed to a large extent by proper sales training and channel development."
How mis-selling works
A large chunk of about 52,500 complaints received by the insurance ombudsman across the country in FY24 pertained to mis-selling and misrepresenting policy terms and conditions, and issuing a policy not conforming to the proposal–under Sections 13(1) d and Sec 13 (1) g of the Insurance Ombudsman Rules. More than 70% of the complaints were against life insurers under the two sections. After life insurance, health cover-related complaints follow the list of grievances.
The Irdai separately received 215,569 grievances in FY24 on its Bima Bharosa portal, of which 120,726 were related to life insurance and 94,843 to general Insurance, largely health covers. A majority of the complaints were against public sector entities in the life segment, while most non-life complaints were against private insurers.
Insurance-related grievances were among the 296,000 complaints that the Office of RBI Ombudsman received in FY24-25 compared with 293,000 in FY23-24.
Irdai, in its communication on such mis-selling to lenders, flagged numerous instances of an insurance policy being forcibly sold or mis-sold by banks and NBFCs by bundling these with housing or other loans. For availing a locker facility, lenders insist on purchasing an insurance policy and, at times, claim that it is mandatory. Insurance plans have also been issued without the consent of customers, and there have been cases where customers claim not to have signed the policy documents or that they were issued policies with incorrect contact details.
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The insurance regulator found that single-premium insurance policies have been issued in lieu of fixed deposit receipts, claiming that these will provide better benefits. Senior citizens have been sold long-term life insurance policies having higher premiums, even though they may not require such coverage.
And regular-premium policies were issued in place of single-premium ones, and renewal premiums were debited from customers' bank accounts without any intimation, assuring that they would get double the payment after a certain period.
In most cases, when a complaint is lodged, issues are resolved, and the premium is returned in a few cases. Still, that has not deterred mis-selling by financial institutions that act as a corporate agent for insurers.
Need for better governance
'Curbing mis-selling has become a key priority for banks, insurers and the regulator, with several targeted measures being undertaken. Insurers are simplifying products, strengthening onboarding with video verification, and enhancing disclosures to improve transparency. Sales teams are being equipped with digital tools for suitability checks, while incentive structures are being aligned with long-term customer outcomes," said Shruti Ladwa, partner and insurance leader, EY India. 'Irdai has further reinforced these efforts by extending the free-look period to 30 days and enabling video-based identification. Eliminating mis-selling will require concerted efforts across all stakeholders to build an empowered and informed customer base."
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According to Narendra Ganpule, partner and insurance industry leader, Grant Thornton Bharat, it is pertinent for every bank to instil values of integrity and probity in the sales staff and relationship managers so that customer interest is put at the centre, and not the sales or growth targets. 'Governance across three lines of defence, especially awareness at the operating level, needs to be strengthened to reduce the frequency of mis-selling instances."
