On June 27, 2025, Financial Services Secretary M Nagaraju issued a stern warning to banks, urging them to eliminate insurance mis-selling, ensure affordable premiums, and uphold fair claims processing to boost market penetration and customer trust. Speaking at an event announcing strategic partnerships between Central Bank of India and Italy’s Generali Group, Nagaraju emphasized the need for transparency in the bancassurance model, which, while effective in expanding insurance reach, has drawn scrutiny for unethical practices. Both the Insurance Regulatory and Development Authority of India (IRDAI) and the Finance Ministry have repeatedly flagged mis-selling as a barrier to investor protection and industry growth. This article explores the implications of these concerns, industry responses, and the path forward for India’s insurance sector.
The Issue of Mis-selling in Bancassurance
The bancassurance model, where banks act as intermediaries to sell insurance products, has been a cornerstone of India’s insurance growth, contributing to a rise in penetration from 3.76% in 2014 to 4.2% in 2024, per IRDAI data. However, the model has faced criticism for mis-selling practices, such as bundling insurance with loans, issuing policies without customer consent, or misrepresenting policy features. Nagaraju highlighted a common issue: “Often, a particular product is explained to the customer, but a separate product is sold to them.” Such practices erode trust and lead to policy lapses, as high premiums discourage renewals.
The Finance Ministry’s Department of Financial Services (DFS) has directed banks to decouple insurance sales targets from employee incentives and promote financial literacy to ensure products align with customer needs. A June 3, 2025, directive emphasized that core banking services, like loans or locker facilities, should not be forcibly linked to insurance purchases. IRDAI has also flagged instances where single-premium policies were sold as substitutes for fixed deposits or long-term policies were pushed to senior citizens with unsuitable coverage.
Regulatory and Industry Response
IRDAI has taken proactive steps to curb mis-selling. In 2025, the regulator extended the free-look period for policies to 30 days, allowing customers more time to review terms, and introduced video-based verification to enhance onboarding transparency. Additionally, IRDAI’s guidelines prohibit misrepresentation of policy features and mandate clear disclosures, categorizing non-disclosure of material facts as fraud. The Finance Ministry has echoed these concerns, with Finance Minister Nirmala Sitharaman noting in October 2024 that mis-selling undermines investor protection and industry credibility.
Nagaraju stressed that affordable premiums and fair claims processing are critical for building trust. “Insurance companies will survive only when people have trust,” he said, warning that deviations from policy commitments could lead to reputational damage. IRDAI data shows that non-life insurers faced ₹25,000 crore in compliance costs in 2024 to align with stricter regulations, highlighting the financial stakes of ethical practices.
Industry Leader Perspectives
Industry leaders have acknowledged the urgency of addressing mis-selling. Shruti Ladwa, Partner and Insurance Leader at EY India, stated, “Curbing mis-selling is a priority. Insurers are simplifying products, enhancing disclosures, and using digital tools for suitability checks to align incentives with customer outcomes.” Narendra Ganpule, Partner at Grant Thornton Bharat, emphasized, “Banks must instill integrity in sales staff, prioritizing customer interests over targets.”
Anupam Gupta, a financial analyst, commented, “Mis-selling not only harms customers but also stifles insurance penetration. Affordable premiums and transparent claims processes are non-negotiable for growth.” Meanwhile, Sanjay Kumar, CEO of a leading private insurer, noted, “The bancassurance model’s success depends on trust. Banks and insurers must collaborate to educate customers and align products with their needs.”
Social Media Reactions from Industry Leaders
The issue has sparked discussions on X, reflecting industry sentiment:
@InsureIndia: “DFS Secretary’s warning on mis-selling is timely. Banks must prioritize transparency to boost insurance trust. #Bancassurance #IRDAI”
@FinExpertIN: “Affordable premiums and fair claims are key to insurance growth. Kudos to DFS for tackling mis-selling! #InsuranceReform #Finance”
@BankingGuru: “Mis-selling hurts customers and banks alike. Time for ethical sales practices in bancassurance. #DFS #Insurance”
Economic and Policy Implications
Mis-selling has tangible economic consequences. High premiums and policy lapses reduce insurance penetration, which remains low at 4.2% compared to global averages of 7%. Policy lapses also strain insurers’ solvency, with non-life public sector insurers requiring up to ₹25,000 crore to meet IRDAI’s regulatory standards. The Finance Ministry’s push for ethical practices aligns with broader reforms, including a proposed Insurance Laws (Amendment) Bill to allow 100% FDI and simplify regulations, expected in the 2025 budget session.
The DFS’s directive to delink incentives from sales targets aims to curb aggressive selling, while IRDAI’s consumer education initiatives, such as the www.policyholder.gov.in website, empower customers with information on policy benefits and grievance redressal. These efforts are critical as India aims to double its insurance market size to $250 billion by 2030, per industry estimates.
Challenges and Future Outlook
Despite regulatory interventions, challenges persist. Banks’ reliance on insurance sales for revenue, with bancassurance accounting for 30% of life insurance premiums in 2024, creates pressure to meet targets. Training sales staff to prioritize customer needs over commissions remains a hurdle. Additionally, rural and semi-urban customers, often less financially literate, are more vulnerable to mis-selling, necessitating targeted education campaigns.
Looking ahead, the industry must adopt technology-driven solutions, such as AI-based suitability assessments and blockchain for transparent claims processing, to enhance trust. The Finance Ministry and IRDAI are planning workshops to train bank staff on ethical sales practices, with a focus on rural branches. Collaborative efforts between regulators, banks, and insurers will be key to fostering a customer-centric insurance ecosystem.
Conclusion
The DFS Secretary’s warning underscores a critical juncture for India’s bancassurance model. By prioritizing affordable premiums, fair claims processing, and transparency, banks and insurers can rebuild customer trust and drive insurance penetration. With IRDAI’s regulatory reforms and the Finance Ministry’s oversight, the industry is poised to address mis-selling, but sustained efforts are needed to align incentives with customer welfare. As India aims to become a global insurance hub, ethical practices will be the cornerstone of sustainable growth.
