Mis-selling in Insurance

Mis-selling in insurance refers to the unethical or inappropriate sale of insurance products to customers without regard to their needs, financial capacity or informed consent. In India’s evolving banking and financial ecosystem, insurance mis-selling has emerged as a significant concern, particularly with the expansion of bancassurance and aggressive retail financial marketing. Its implications extend beyond individual consumers to affect trust, financial stability and the credibility of the financial system as a whole.

Concept and Meaning of Insurance Mis-selling

Insurance mis-selling occurs when a policy is sold through misleading information, non-disclosure of material facts, coercion or false promises regarding returns and benefits. Customers may be induced to purchase products that are unsuitable for their age, income, risk appetite or financial goals.
Common forms of mis-selling include:

• Presenting insurance policies as guaranteed investment or savings schemes
• Concealing exclusions, lock-in periods or surrender charges
• Pressurising customers into buying bundled insurance products with loans or bank accounts

Such practices undermine the principle of informed consent, which is central to ethical financial intermediation.

Growth of Mis-selling in the Indian Context

The rapid expansion of the insurance sector in India, coupled with increased penetration through banks and digital platforms, has heightened the risk of mis-selling. Bancassurance, where banks distribute insurance products, has been a major contributor due to sales-driven targets imposed on bank staff.
Insurance products, particularly unit-linked insurance plans, are often complex, making it difficult for customers to fully understand risk, charges and long-term commitments. Low levels of financial literacy among large sections of the population further exacerbate vulnerability to mis-selling.

Regulatory Framework and Oversight

The insurance sector in India is regulated by the Insurance Regulatory and Development Authority of India, which issues guidelines to protect policyholders and promote fair market conduct. Regulations require insurers and intermediaries to ensure product suitability, transparent disclosures and proper documentation.
From the banking side, the Reserve Bank of India plays a complementary role by issuing conduct norms for banks engaged in insurance distribution. These frameworks aim to reduce conflicts of interest and ensure that customers are not coerced into purchasing insurance products.

Impact on Consumers

Mis-selling has serious financial and psychological consequences for consumers. Customers may find themselves locked into long-term policies with high premiums and low liquidity, adversely affecting household financial planning. Inadequate coverage or inappropriate products can also leave families exposed to financial shocks.
Loss of trust is another critical outcome. Repeated instances of mis-selling discourage consumers from engaging with formal insurance and banking systems, potentially increasing reliance on informal and unregulated financial arrangements.

Implications for the Banking and Financial System

At a systemic level, insurance mis-selling damages the credibility of financial institutions. Banks and insurers risk reputational harm, regulatory penalties and increased customer grievances. Persistent mis-selling can also distort financial markets by channelling household savings into unsuitable or inefficient financial products.
Moreover, excessive focus on commission-driven sales diverts attention from long-term financial intermediation objectives, weakening the role of insurance as a risk-management tool rather than a misrepresented investment product.

Economic Impact on the Indian Economy

Insurance is a vital component of economic development, providing risk protection, mobilising long-term savings and supporting infrastructure financing. Mis-selling disrupts this role by reducing effective insurance coverage and discouraging genuine participation.
In the long run, widespread mistrust can slow insurance penetration, limiting the sector’s contribution to capital formation and economic resilience. This has broader macroeconomic implications, particularly in a developing economy where social security systems are limited and private insurance plays a compensatory role.

Measures to Curb Insurance Mis-selling

Regulatory authorities have introduced several measures to address mis-selling, including:

• Mandatory need-based selling and suitability assessments
• Standardised benefit illustrations and disclosure norms
• Free-look periods allowing customers to cancel policies without penalty