Irdai Forms Panels for Regulatory Violations, Addresses Mis-selling and Data Leakage

The Insurance Regulatory and Development Authority of India (Irdai) has set its eye on curbing the violations of regulatory norms by insurers and intermediaries. In its 132nd meeting held on Tuesday (15 July 2025), the insurance regulator set up panels comprised of Whole-Time Members that will scrutinise observed violations of regulatory norms by insurers and intermediaries and tackle issues like mis-selling and data leakage to strengthen consumer safeguards for policyholders.

Irdai Establishes Enforcement Panels

The regulator, in an official release, explained that as part of its "enforcement function," to "decide on the violations observed as regards the provisions of the Insurance Act and Regulations issued thereunder, with respect to certain Insurers/Insurance Intermediaries, panels of Whole-Time Members were formed." This function would ensure swift handling of reported issues.

Policyholder Impact and Systemic Mis-selling in India

Reports highlight data leakage and mis-selling of policies within the insurance sector as becoming a grave issue. Such mis-selling deeply affects policyholders in the long run.

When customers buy unsuitable or fraudulent policies, financial losses often result from claim denials, unexpected policy lapses, or being tied to products not meeting their true needs.

A recent report by 1 Finance, a personal finance advisory firm, noted that banks earned over Rs 1,700 crore in commissions in financial year 2024 alone from selling financial products, largely insurance and mutual funds. The downside of this practice is that many of those products never fulfilled their intended purpose for the policyholders since many of these insurance policies were either surrendered, lapsed, or discontinued early.

The data from the report noted that around 43 per cent of all benefits paid by the top 10 life insurers fall into the surrendered, withdrawn, discontinued, or lapsed category of insurance.

When this happens, policyholders are left with little or nothing, whereas the intermediaries pocket hefty commissions.

Additionally, policyholders may pay unnecessarily high premiums for insufficient or irrelevant coverage, leaving them exposed when genuine claims arise. The intricate nature and lack of transparency in Indian insurance contracts worsen the problem, eroding consumer trust and confidence in the sector. Consistent mis-selling damages insurer reputations and undermines overall industry stability. The human cost of mis-selling is severe, leading to significant financial and emotional distress.

For instance, when agents sell unsuitable policies, such as endowment plans to farmers requiring straightforward coverage, policyholders suffer substantial losses upon surrendering them. Current Irdai rules permit insurers to return only 30 per cent of premiums if surrendered in the second year, imposing a 70 per cent surrender cost. This compounds the harm when coupled with denied claims: policyholders find critical exclusions only during medical emergencies, as observed when hospitals demanded documentation undisclosed during sales.

Beyond financial ruin, mis-selling erodes public trust. For example, a report by LocalCircles found that 52 per cent of health insurance customers reported premium increases exceeding 25 per cent in 2023, amidst widespread repudiation disputes. The psychological impact includes anxiety and mistrust towards financial institutions, creating long-term obstacles to financial inclusion.

Irdai’s own data recorded that mis-selling complaints formed 20 per cent of the 124,293 grievances against life insurers in 2022-23, with 50.4 per cent of private sector insurer complaints arising from "unfair business practices". These figures show a systemic crisis where vulnerable consumers, especially in rural areas, routinely encounter "deceptive sales tactics".

Irdai’s Efforts to Address Unfair Practices

Over the past year, IRDAI has introduced targeted measures to curb mis-selling within the insurance sector. These actions include tightening "Suitability Assessment Guidelines," improving disclosures and product transparency, making video-based verification mandatory for certain products, and requiring mandatory training and certification for agents and intermediaries.

The recent announcement detailing the formation of whole-time member panels reinforces this framework, aiming to promptly resolve regulatory breaches. Additionally, Irdai has launched public awareness campaigns and digital grievance redressal platforms to help consumers identify and report mis-selling.