IRDAI’s Proposed Regulations May Stifle Sector Growth Without Addressing Core Challenges
Key Highlights:
- IRDAI’s potential move to limit dependence on parent banks in bancassurance channels criticized as misdirected.
- Mis-selling attributed to poor products and misaligned distributor incentives rather than specific channels.
- Emphasis on improving product propositions rather than restrictive regulatory measures.
India’s insurance industry is facing scrutiny as the Insurance Regulatory and Development Authority of India (IRDAI) considers introducing regulations to limit the reliance of life insurance companies on their parent banks for business via bancassurance channels. However, Emkay Research warns that such measures may hinder the sector’s growth without tackling the actual issue of mis-selling, which persists across various channels.
IRDAI’s Proposed Measures and Concerns
Reports suggest that IRDAI is exploring ways to encourage diversification across multiple distribution channels to ensure balanced industry growth. This comes after the formation of a task force in October 2023 to review and improve the existing bancassurance framework amid mounting complaints of mis-selling or forced selling of policies.
Both Finance Minister Nirmala Sitharaman and IRDAI Chairman Debasish Panda have voiced concerns about mis-selling practices through banks. They emphasized the need to rebuild customer trust in the insurance system and urged banks to concentrate on their core financial services.
Emkay Research’s Analysis
According to Emkay Research, the proposed regulatory measures are unlikely to address mis-selling effectively. Instead, they could stifle growth by constraining the bancassurance channel, which has been instrumental in driving the distribution of low-cost unit-linked insurance plans (ULIPs) after commissions for these products were rationalized.
The report highlights that mis-selling stems from poor product designs and misaligned incentives for distributors rather than the bancassurance channel itself. Using 13th-month persistency rates—a key indicator of policy lapses—as a measure of mis-selling, private life insurers using bancassurance channels reportedly perform better than those relying on other distribution methods.
A Need for Product-Centric Reforms
The report emphasizes improving the product value proposition as a more effective way to address customer concerns and ensure sustainable growth. It noted that while mis-selling isn’t unique to the insurance sector, regulators should continue refining policies to align incentives and promote transparency in the sale of financial products.
Conclusion
Limiting the bancassurance business share could risk hampering the broader growth of the life insurance sector, which relies on this channel for efficiently distributing products like ULIPs. A balanced approach focusing on customer-centric product development and addressing misaligned incentives in distribution would better address the underlying issues of mis-selling.
This debate underscores the importance of regulatory measures that nurture industry growth while protecting consumer interests—a balance that remains critical for the long-term success of India’s insurance ecosystem.
