The Regulator Says Insurance is Broken

Let's Talk Money with Monika Halan

Monika Halan examines the Indian Insurance Regulatory and Development Authority's (IRDAI) September consultation paper, which exposes systemic flaws in how insurance is sold and distributed. She breaks down

Key takeaways

• IRDAI's consultation paper reveals life insurance business costs consume ~40% of premiums, while general insurance reaches 48%, far exceeding mutual fund industry benchmarks.
• Following the removal of commission caps in 2023, corporate agent payouts grew by 125% against a 28% premium increase in life insurance, and motor insurance commissions surged 259%.

Main topics

• IRDAI insurance regulation
• Insurance distribution costs & commissions

Notable quotes

"The cost of doing business from your premium... it's almost 40% of the premium."

Conclusion

The episode underscores a critical regulatory pivot toward consumer-centric

Transcript preview

Speaker 1 (0:00) Hi, I'm Monica Hallan and this is my podcast, Let's Talk Money. Every Friday, a new episode will drop that gives you a snapshot analysis of one money-related topic that has meaning in your life. And then I answer your money questions. My hope is to put you on the path to financial stability and freedom. So, let's talk money. Speaker 1 (0:30) Last week something quite amazing happened. I think listeners of this podcast would know that for a very long time, and in fact, it's been more than 15 years, I've been asking very simple questions of the insurance regulator and the insurance industry. Which is why is it so difficult to make insurance work in the interest of the policyholder? It is our rupee which makes the entire industry and distribution and profits and bonuses and junkets and everything go around. But why is it that I feel as if I've been cheated, lied to, defrauded and my claims don't come through? I don't know what I'm buying. I don't know what the product can actually do. Tell me. what will the rate of return be? Tell me what does it cost to exit early? What does the health insurance policy actually cover? What are all the tricks and traps embedded in it? What are the chances that my claim will be paid? Why is it that persistency of life insurance is so low? Less than half the policies sold complete even five years. And these are policies for 10, 15, 20 or whole life, 99 year policies. Why is the person selling me these policies can earn very high commissions, but has no responsibility once the sale is done? So banks will say, oh, that person moved away as if the bank carries no responsibility. And honestly, for all these years, asking these questions was treated as proof that I did not know insurance. The standard response used to be the consumer has to do their own due diligence. If you bought the wrong policy, well, perhaps you should have read the fine print. I mean, who can read a hundred pages of legalese? This is why the IRDA. consultation paper of September 23 is quite remarkable. The paper is in the show links. If you want a link to the consultation paper, it is there. Because what has happened is for the first time, the regulator itself has put out data that lays bare some of the problems in the way insurance is sold. And IRDA is actually proposing changes to address them. And after years and years of saying, and this was also the regulatory thought within IRDA for many, for two decades, it's been like this, where insiders into the regulator would say that the consumers are the problem because they don't understand. Regulator now is saying, perhaps the way the system is designed has something to do with the problem. Finally, I mean. Finally, they have come to this thing that it's a design problem of the way the industry is set up with the distributor tail wagging the dog and really gouging out the customer in a million ways. So for the regulator to say this is a big shift. But remember, this is a consultation paper. These are just proposals. They are not final rules. There'll be a lot of debate. A lot of blood will be shed and tears will be shed. lobbying has started, there is huge pressure to dilute what is in this paper. But if it's implemented, this could actually mark the beginning of a very important reset in the Indian insurance industry. And honestly, this is going to be good finally for the industry and the distributors because the way the industry is set up today, it is unsustainable. So what IRDN did was very clever. It's just put out data which the industry cannot refute. And using the data, it's making the case that things need to change. What is this data telling us? Really uncomfortable stuff. The cost of running the insurance business is very, very high. In life insurance, the cost of doing business from your premium, how much of the money goes into just running the business? It's almost 40 % of the premium. In general insurance, it's gone up to 48%. So half of your money is going into sales commissions and costs linked to that sale. You know, the cost of the insurance, the protection is not even in this. The mortality underwriting cost is not even in these costs. It's extra. So no wonder. What happens is a large part of the premium is consumed by the machinery of selling. And then, of course, on top of it are other costs of running the business. Rather than this money going towards the fundamental purpose of insurance, which is paying claims, generating returns when the product has an investment component, and covering the legitimate costs of providing the service. It doesn't do that. It takes much more. Mutual fund industry, how much does it cost to run the business? It's about... At most, it's around 2.5 % of the assets under