Context:
- The Reserve Bank of India (RBI) is set to release final guidelines on ‘Responsible Business Conduct’, targeting the aggressive mis-selling of third-party products (like insurance) by banks.
- The Problem: A massive spike in commissions—₹60,800 crore in life insurance alone for FY25 (up 18%)—while premiums grew only in single digits. This indicates that insurers are paying more to “acquire” customers than they are earning from them.
BACKGROUND CONCEPTS
1. What is Mis-selling?
Mis-selling occurs when a financial product is sold to a customer using deliberate misrepresentation or by hiding key risks. In banks, this often looks like “bundling” insurance with a loan or pushing a complex investment product to someone seeking a simple savings account.
2. Bancassurance
This is the partnership between a bank and an insurance company. Banks use their massive branch networks to sell insurance. While efficient, the high “upfront commissions” create a perverse incentive for bank staff to prioritize sales targets over customer needs.
3. Expense of Management (EOM)
IRDAI limits the total amount an insurer can spend on operating costs and commissions, known as EOM. However, despite these caps, commission expenses have continued to rise faster than actual business growth.
PROPOSED REGULATORY SHIFTS
The RBI and IRDAI are looking at different “levers” to fix the system:
- Staggered/Trail-based Commissions: Instead of paying the agent 30–40% of the premium in the first year (front-loading), commissions would be spread out over the life of the policy. If the customer stops paying because they were cheated, the agent stops earning.
- Board Accountability: Industry experts suggest that the Board of Directors of insurance companies should be held personally responsible for fixing commission policies that stay within legal limits.
- Removal of Sales Inducements: Moving away from internal bank contests or “sales prizes” for staff who sell the most insurance, which currently fuels aggressive behavior.
CONCEPTUAL MCQs
Q1. What is the primary driver of “Mis-selling” in banks according to the report?
A) Lack of computers in bank branches.
B) High upfront commissions paid by insurers to bank distributors.
C) Customers wanting to lose their money.
D) High interest rates on savings accounts.
Q2. What does “Front-loading” of commissions imply?
A) Paying the commission only after the policy matures.
B) Paying a significant portion of the total commission in the very first year of the policy.
C) Charging the customer a fee to enter the bank.
D) Giving the agent a physical load of cash.
Q3. How would “Trail-based” commissions help curb malpractices?
A) It makes the commission illegal.
B) It ensures the seller only gets paid as long as the policy remains active and the customer is satisfied.
C) It increases the price of the insurance for the customer.
D) It allows the bank to keep all the money.
Q4. Which regulatory body is responsible for capping the “Expense of Management” (EOM) for insurers?
A) RBI
B) SEBI
C) IRDAI
D) PFRDA
ANSWERS
Q1: B (Explanation: Incentives drive behavior; high commissions lead to aggressive, often unethical, sales tactics.)
Q2: B (Explanation: Front-loading encourages “hit and run” sales where the agent secures a big fee and loses interest in the customer’s long-term outcome.)
Q3: B (Explanation: Staggering payments aligns the interests of the agent with the long-term persistence of the policy.)
Q4: C (Explanation: IRDAI is the sole regulator for the insurance sector’s operational costs and commission structures.)
EXAM RELEVANCE
| Exam | Focus Area | Relevance Level |
| RBI Grade B | Finance – Conduct Risk, Bancassurance, Consumer Protection | Critical |
| IRDAI Grade A | Insurance Marketing, EOM Limits, Ethics in Selling | Critical |
