The Mis-selling Crisis in India’s Life Insurance Sector

In India, life insurance is intended to serve as a protective safety net for families, but unfortunately, it has morphed into a perilous trap for many. The underlying issues stem from high commission structures, intense sales pressure, and a general lack of financial literacy, all of which contribute to a serious mis-selling crisis. This situation leaves countless families at financial risk, while insurance companies and banks continue to profit.

A System Tilted Against Policyholders

The experience of purchasing life insurance in India has increasingly become akin to participating in a rigged game, where the odds are stacked against policyholders. A shocking statistic reveals that 43.3% of the benefits paid by the top ten life insurers are associated with surrendered, withdrawn, or lapsed policies. This alarming trend indicates that, instead of providing critical support during times of need, many policies are failing the very families they are designed to protect.

The persistency rates paint a grim picture as well. Data shows that the 61-month persistency ratio for major insurers is a mere 51%, suggesting that nearly half of all policies lapse within five years. For those who prematurely surrender their policies, recovery rates can be dishearteningly low—sometimes as little as 30% of the premiums paid in the second year. These statistics underline the stark reality that life insurance no longer reliably fulfills its intended purpose of safeguarding families.

The Commission Trap

Central to the mis-selling crisis is India’s commission-driven sales model. Insurance agents are often incentivized to capture up to 65% of the first-year premium as commission, fostering an environment of relentless pressure to meet sales targets. This creates a scenario where customer interests are frequently sidelined.

A recent survey conducted by 1 Finance, encompassing 20 banks in 16 cities, highlighted the widespread malpractices in this system. A significant 57% of relationship managers admitted being instructed to promote financial products without regard to their suitability for potential buyers. This aggressive push not only misaligns the interests of customers but ultimately compromises the overall integrity of the life insurance market.

The practice of “churning” further complicates the situation. Agents often persuade customers to surrender existing policies and purchase new ones, solely to generate additional commissions. Instead of benefiting from affordable term plans, many families find themselves steered toward more expensive investment-linked products, leaving them financially exposed when they need coverage the most.

A Broken Promise

The Insurance Regulatory and Development Authority of India (IRDAI) has recognized the severity of this issue, recording over 215,569 grievances on its Bima Bharosa portal in the previous fiscal year. Life insurance accounts for more than 120,000 of these complaints, and alarmingly, 20% of all grievances in 2022-23 were connected to unfair practices, predominantly mis-selling.

Health insurance complaints are also surging, with a year-on-year increase of 21.7%. The Council for Insurance Ombudsmen dealt with over 52,000 cases in the last fiscal year, over half of which were tied to mis-selling issues. These numbers underscore a troubling trend in the financial landscape, raising concerns about trust in such essential services.

The financial implications for the banking sector are significant as well. In FY24, India’s top 15 banks earned around ₹21,773 crore in commissions, with HDFC Bank leading the pack at ₹6,467 crore, followed closely by SBI and Axis Bank. For some institutions, commissions represented more than a quarter of their total income.

Experts agree that without comprehensive reforms, the mis-selling epidemic will continue to deteriorate public trust in India’s insurance framework. Families looking for security will remain ensnared in a cycle marked by lapsed policies, financial loss, and unfulfilled promises.

Insurance, which was originally intended to serve as a safeguard for households, has unfortunately become a tool for exploitation. In this grim scenario, it often appears that the house always wins.