IRDAI takes Big Action against Insurance Mis-selling in Banks, IRDAI Plans Changes in Bancassurance Model

The Insurance Regulatory and Development Authority of India (IRDAI) is planning an important change in the way banks and insurance companies work together. According to a report, IRDAI has suggested to the Ministry of Finance that the current commission-based model in bancassurance should be replaced with a transaction fee model. These changes are being made due to various complaints by bank customers about the mis-selling of insurance products. Earlier the RBI Governor and the Union Finance Minister had raised voice against mis-selling of insurance products in banks.

What is Bancassurance?

Bancassurance is a system where banks partner with insurance companies to sell insurance products like life insurance, health insurance, and general insurance to their customers. Instead of setting up separate offices, insurance companies use the bank’s network—like its branches and customer base—to sell their products. In return, the bank earns a commission for each insurance policy sold.

What Change is IRDAI Proposing?

The IRDAI now wants to replace the commission model with a transaction fee model. This means that instead of getting a commission from the insurance company, the bank will earn a fee for every transaction or sale it makes. According to a report, this transaction fee will not have an upper limit (no ceiling), and the price will be set by the market.

Why is This Change Being Suggested?

Over the past few years, both the Ministry of Finance and IRDAI have received complaints from customers about forced selling or mis-selling of insurance products by banks. Many customers feel pressured to buy policies they don’t need, just so banks can meet their sales targets and earn commissions.

To address these concerns, in 2023, IRDAI set up a task force to carefully study the bancassurance model, identify problems, and suggest ways to improve it. Some of the main issues IRDAI is worried about are:

• Banks pushing poor-quality insurance products
• Uneven or unfair incentives for selling certain products

Recently, RBI had fined Bank of Baroda for violation of norms related to Insurance selling in Banks. The bank allowed an insurance company to give non-cash incentives (such as gifts or other benefits) to bank employees who were involved in selling insurance. Click here to read this news.

How Big Are Bancassurance Partnerships in India?

Bancassurance plays a huge role in India’s insurance market. Many major banks have their own insurance companies or are closely linked to them. For example:

• SBI Life Insurance, backed by the State Bank of India (SBI), gets around 60% of its business through bancassurance, according to Emkay Research.
• HDFC Life Insurance, supported by HDFC Bank, earns about 65% of its business from this model.
• ICICI Prudential Life Insurance, backed by ICICI Bank, gets around 29% of its business through bancassurance.

What Does This Mean for Customers?

If the transaction fee model is introduced, it could lead to more transparency in how banks sell insurance. Since banks will earn a flat fee per sale (instead of a percentage commission), they may be less motivated to push expensive or unnecessary products. This change is expected to:

• Reduce the chances of mis-selling
• Give customers better insurance options
• Make the market more competitive, as fees will be decided by market forces

IRDAI’s proposed change in the bancassurance model is aimed at protecting customers and improving trust in the system. While it’s still under discussion with the Ministry of Finance, this shift could reshape how insurance is sold through banks in India.