Insurance reform must protect the borrower’s right to refuse: When taking a housing loan, the last thing on a borrower’s mind may be an insurance policy. Yet the loan application can quickly become an occasion to sell one. Cover against death or damage to the property may be useful. The difficulty is knowing whether the recommendation reflects the borrower’s needs or the commission earned by the seller.
This conflict is central to the Insurance Regulatory and Development Authority of India’s September 2026 proposals on distribution costs, commissions and sales practices. Lower commissions may reduce the incentive to push unsuitable policies. They cannot, by themselves, ensure that borrowers can refuse insurance without fearing for their loan application.
READ | Insurance penetration reflects India’s household risks
Purchasing insurance is complicated. Customers need help understanding exclusions, comparing cover and assessing how a policy would respond to a claim. Intermediaries provide a service, and commissions pay for it. Regulation must distinguish between incentives that make advice available and those that distort the advice given.
When commissions influence insurance advice
The problem begins when compensation rewards a sale more generously than it rewards suitability. If one policy pays a higher commission than another, the intermediary has a financial reason to recommend it. That does not establish that the policy is unsuitable. It does mean the customer needs some assurance that the recommendation can be justified independently of the payout.
Insurers and intermediaries generally understand policy terms better than buyers do. A customer may struggle to judge whether an exclusion is significant or whether cheaper cover would serve the same purpose. The person relied upon to explain these differences also benefits from completing the sale.
This is a principal-agent problem, with an additional complication: an insurance salesperson may represent an insurer rather than provide independent advice across the market. Customers should be told whose products the seller can offer and how the seller is paid.
Reducing commissions could curb aggressive selling, but the effect will depend on how the rules are designed. If remuneration becomes inadequate, intermediaries may concentrate on larger policies or customers who cost less to serve. Buyers who need considerable assistance could find it harder to obtain advice.
That is a serious objection to indiscriminate cuts. It is also an argument for relating remuneration to the work involved, rather than allowing distribution revenue to excuse unsuitable sales.
READ | Will insurance commission cuts make policies cheaper?
Home loan insurance can become coercive
Selling insurance alongside credit is not inherently objectionable. Life cover can help a borrower’s family meet the outstanding debt after a death. Property insurance can protect the asset securing the loan. Arranging either through the lender may save time.
Convenience becomes coercion when the borrower cannot tell whether insurance is a lending condition, a recommendation or an optional purchase. Someone who believes refusal could jeopardise a home loan is unlikely to compare policies freely. The lender’s control over access to credit weakens the customer’s bargaining position.
The National Housing Bank issued an advisory on insurance mis-selling with housing loans on December 10, 2024, followed by another in March 2025. Reported concerns included borrowers being unaware of policy terms, inadequate consent records and insurance tenures shorter than the associated loans. NHB’s published advisory register records a further intervention on September 28, 2026.
A shorter insurance tenure does not automatically establish mis-selling. A borrower may knowingly choose limited cover. The failure arises when that limitation is concealed, poorly explained or inconsistent with the purpose for which the policy was recommended.
The distinction between bundling and tying is therefore important. A package may offer convenience or better terms. Making access to credit depend on buying the lender’s chosen policy can deprive the borrower of meaningful choice.
Disclosure needs enforceable accountability
IRDAI’s proposed reforms address more than commission levels. They include stronger suitability requirements, restrictions on volume-linked or reward-linked incentives for bank and non-banking financial company staff selling insurance, and measures to identify the individual responsible for a sale. The proposals also envisage recovering commissions in cases of mis-selling. These remain proposals, rather than measures that should be described as already in force.
READ | IRDAI’s commission caps could reshape insurance distribution
Such accountability is necessary because disclosure alone cannot resolve the conflict. A customer can know that a seller earns a commission and still lack the information needed to assess the recommendation. Signing a form also provides little protection if the terms were poorly explained or the borrower felt unable to refuse.
Commission disclosures should be standardised and understandable. They should identify the financial incentives behind a recommendation without expecting the customer to decipher an insurer’s entire remuneration policy.
Loan documents should separately explain any insurance requirement and its purpose. Where cover is required to protect the collateral, borrowers should understand whether an existing policy or cover bought elsewhere would meet that requirement. Optional policies should be identified clearly, with refusal carrying no undisclosed consequence for the lending decision.
The cost comparison must also be complete. If an insurance premium is added to the loan, the borrower needs to see the interest payable on that amount. A small addition to the monthly instalment can obscure a substantial financing cost.
Judge distribution by the protection delivered
Regulatory scrutiny should extend beyond distribution expenses and the number of policies sold. Early policy lapses, complaints about sales practices and disputes over claims can help identify problems. None proves mis-selling on its own; together, they can show where closer investigation is warranted.
Insurers should also examine whether particular channels repeatedly sell policies that customers surrender early or later discover do not provide the expected cover. Responsibility cannot end with the intermediary when the insurer accepts the business and benefits from it.
The borrower should not have to master a complicated policy document to obtain fair treatment. The seller must be able to explain why the cover is suitable, what it costs and which alternatives were considered. For an optional policy sold alongside a home loan, the decisive test is whether the customer can decline it without putting the loan at risk.
Natasha Choudhary is an economics student and Dr Faraz Ahmad is Assistant Professor of Economics at the School of Social Sciences, CHRIST University, Delhi-NCR Campus.