Mis-selling

What is mis-selling?

Mis-selling is the sale of an insurance product to a customer for whom it is unsuitable, or through misleading, incomplete or coercive selling. The policy may be technically valid, but the customer did not understand what they bought, or bought it because of a false promise or pressure. In IRDAI's complaint data, mis-selling falls under the category of unfair business practices (UFBP).

Typical forms in India include:

• presenting a life insurance savings plan as a fixed deposit or a guaranteed high-return investment;
• describing a regular premium policy as a one-time payment;
• making a loan, or faster loan approval, conditional on buying insurance;
• selling a large-premium plan to someone who cannot afford to continue paying;
• persuading a customer to surrender an existing policy to buy a new one;
• hiding exclusions, waiting periods or lock-in periods;
• filling in or altering the proposal form without the customer's knowledge.

How mis-selling is regulated

Insurance law and IRDAI rules. Section 41 of the Insurance Act prohibits rebates and inducements. The IRDAI (Appointment of Insurance Agents) Regulations, 2016 set a code of conduct that bars inducing customers to hide information or give false information, offering terms the insurer does not offer, and forcing a policyholder to drop an existing policy for a new one. The insurer is responsible for its agents' acts. The IRDAI (Protection of Policyholders' Interests, Operations and Allied Matters of Insurers) Regulations, 2024 and the related master circular set disclosure, benefit illustration, free look and grievance requirements. IRDAI already prohibits compulsory bundling of insurance with loans by corporate agents.

Scale. IRDAI's annual report for 2024-25, as reported by PTI, recorded 26,667 UFBP grievances against life insurers, 22.14% of all life grievances, up from 23,335 (19.33%) in 2023-24. IRDAI called mis-selling a significant concern and asked insurers to assess product suitability, put in place channel-specific controls and run periodic root cause analysis of mis-selling complaints.

Seller tagging. From 1 January 2027, under the IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2026, every policy sold through a corporate agent, broker, IMF, web aggregator or CSC must show the name and functional identity of the individual who sold it.

RBI rules for lenders. The RBI's Responsible Business Conduct (Second Amendment) Directions, 2026, issued on 15 June 2026 for commercial banks, with parallel directions for NBFCs and housing finance companies, apply from 1 January 2027. They define mis-selling, ban compulsory bundling of third-party products, require explicit and separate consent for each product with "No" as the default on digital screens, bar paying for a product out of the loan without explicit consent, and require refund and compensation where mis-selling is established.

Proposed reforms. IRDAI's September 2026 consultation paper proposes documenting customer needs and suitability, commission clawback in cases of mis-selling, a ban on volume-linked or reward-linked incentives for bank and NBFC staff selling insurance, and putting information on mis-selling incidents, linked to the individual seller, in the public domain. Comments are due by 25 October 2026.

What mis-selling means for distribution

• It shows up first in persistency. Customers who did not understand the commitment stop paying. A sharp drop in 13th month persistency, or high free-look cancellations, from a branch, partner or seller is an early warning.
• Incentives are the usual root cause. Contests and targets that reward first-year premium volume, especially in bank branches, create pressure to sell the wrong product. Balancing volume with persistency, complaint and suitability measures in scorecards addresses the cause, not the symptom.
• Welcome calls must be real checks. A pre-issuance or post-sale verification call that asks the customer, in plain language, what they think they bought catches problems before the free-look window closes. Scripted calls that only read terms aloud catch very little.
• Need analysis protects the seller. A documented record of the customer's income, goals and the reason for the recommendation is the seller's best defence in a complaint, and may become mandatory.
• Consequences are moving to the individual. With seller tagging from 2027 and the proposed public records, mis-selling will follow the individual across employers. Training on conduct is now part of protecting each seller's career.
• Spurious calls are a separate problem. Fraudulent callers posing as IRDAI or insurers, offering fake bonuses or refunds to induce new purchases, cause complaints that look like mis-selling. Insurers can warn customers at issuance that IRDAI does not sell policies or announce bonuses by phone.