New Delhi, June 2026 — The Reserve Bank of India’s (RBI) aggressive new push against the mis-selling of insurance products by banks is set to upend the traditional bank-led distribution model. While the industry frequently defends its reputation around payout rates, insiders admit that the real rot lies not in unpaid claims, but in how policies are aggressively pushed onto unsuspecting consumers.
The Myth of the “Claims Crisis”
For years, public narrative and media coverage have focused heavily on claims rejection as the insurance sector’s biggest failure. However, according to Asit Rath, MD and CEO of Aviva Life Insurance, the math tells a completely different story.
“For the life insurance industry, claims is not a large issue because 98% some odd percentage is the industry average of claims being passed,” Rath revealed. Instead, the actual crisis plaguing the industry is the predatory nature of how products are sold on the ground, particularly through banking partners.
Pushing Savings in the Shadow of Debt
The most rampant form of mis-selling occurs when banks tie long-term liability and savings products to immediate loans. For instance, a customer walking in to secure a home loan is frequently coerced into buying a multi-year life insurance policy under the guise of mandatory compliance.
Behind the scenes, the mechanics of this strategy are fundamentally flawed:
- Worst Possible Timing: A customer taking out a home loan is consumed by immediate financial pressures, like organizing down payments and interior costs. They lack the long-term financial visibility to commit to a 20- or 30-year savings journey.
- The Lapse Trap: Years later, burdened by EMIs, the customer stops paying the premium. The policy lapses, the customer loses their hard-earned money, and the bank faces no consequences.
Commissions over Customers: The Wrong Currency
The root of the problem stems from incentive-linked sales targets and heavily front-loaded commissions. Agents are financially incentivized to maximize the first-year payout, offering zero financial motivation to service the customer in the fourth, seventh, or tenth year of the policy.
Under the new RBI draft rules and upcoming IRDAI commission guidelines, the “currency of selling” is being forced to change. Recommendations must now be strictly tied to a customer’s specific life stage and risk appetite, rather than the commission it generates for the bank employee. Furthermore, for the first time, financial penalties for mis-selling will be levied directly at the distributor (the bank) rather than being quietly absorbed by the insurance company.
From the Branch Manager to the Boardroom
The execution of these guidelines will require a massive cultural reset. With major private and public banks deploying tens of thousands of employees, the RBI is moving accountability away from isolated branch managers straight to the corporate boardroom. Bank boards will now be directly responsible for monitoring how bancassurance is promoted on the ground.
Data over Disclosure: The Next Decade
As the industry braces for stricter compliance, two major structural shifts are expected to reshape the landscape over the next decade:
- Composite Licenses: Moving toward a one-stop-shop model will allow a single insurer to offer life, health, and motor covers under one roof. This increases customer stickiness and removes the friction of dealing with multiple brokers.
- The Bima Sugam Revolution: Driven by centralized digital repositories, underwriting will shift from being disclosure-driven to entirely data-driven. By accessing verified digital health records upfront, insurers eliminate the trap of subjective self-declarations, preventing legitimate claims from being rejected down the line.
Bottom Line
The era of treating life insurance as an aggressive, commission-fueled add-on to a bank loan is coming to an end. Stricter guardrails may seem onerous to banks accustomed to easy volume, but by forcing distributors to prioritize long-term customer trust over upfront payouts, the industry is finally being steered toward sustainable growth.
