Misbuying: The missing piece in India’s insurance distribution debate

The insurance industry has spent considerable time debating misselling. Regulators are rightly concerned about unsuitable products, misleading representations and distribution practices that do not serve policyholders’ interests. But there is another problem that deserves equal attention, and that is misbuying.

Misselling occurs when a product is sold inappropriately. Misbuying happens when a customer ends up buying insurance that does not adequately address the risks they face. The distinction is important. In misselling, the problem often lies in the manner of sale. In misbuying, the problem lies in the gap between the protection purchased and the protection actually required.

Misbuying can happen even when a policy has been correctly sold, disclosures have been made and the customer has voluntarily purchased the product. This is particularly relevant as the Insurance Regulatory and Development Authority of India (IRDAI) considers an overhaul of the insurance distribution framework.

The problem is bigger than misselling

Insurance is an unusual product. Customers pay for it today, hoping they will never have to use it. Its true value becomes apparent only when something goes wrong. A policy may be correctly issued, the premium may be competitive and the documentation may be in order. Yet, at the time of a claim, the customer may discover that a critical risk is excluded, the sum insured is inadequate or a sub-limit restricts the amount payable. The policy may be operating exactly as designed; the problem is that it may not provide the protection the customer expected.

This raises a fundamental question for the industry: Are we measuring success by the number of policies sold, or by whether those policies provide meaningful protection when a loss occurs?

One of the biggest challenges in insurance is the disproportionate importance given to price. Customers naturally want the lowest premium, while insurers compete for business and distribution channels negotiate hard for competitive rates. There is nothing wrong with price competition. But insurance is not a commodity where the cheapest option is necessarily the best.

Two policies may appear similar while differing significantly in exclusions, deductibles, coverage limits and conditions. Consider a manufacturing business that insures its factory but does not adequately protect itself against the financial consequences of a prolonged shutdown. Or a company that purchases cyber insurance without understanding the limitations of its cover.

In both cases, insurance has been purchased and the premium has been paid. Yet a substantial financial risk may remain uninsured. The consequences become visible only when a loss occurs. The customer may have saved on the premium but exposed the business to a much larger financial loss.

This is the real cost of misbuying.

What should the proposed IRDAI reforms achieve?

IRDAI’s proposed distribution reforms are an important opportunity to improve the economics of insurance, strengthen transparency and address inappropriate selling practices. The consultation on recalibrating insurance distribution economics also raises important questions around commissions, expenses and the incentives shaping distribution.

These are necessary conversations. Distribution costs matter, and customers should ultimately benefit from a more efficient insurance market. However, reducing the cost of selling insurance and improving the quality of insurance protection are two different objectives.

A reduction in distribution costs does not automatically translate into lower premiums. Nor does a lower premium necessarily mean better value for the customer. The outcome depends on how insurers respond, how products are priced and whether savings are passed on to policyholders.

More importantly, if the focus remains predominantly on controlling distribution costs, we risk addressing the economics of insurance without fully addressing why customers remain inadequately insured. Insurance penetration is not simply a function of affordability. It is also a function of awareness, trust, accessibility, product suitability and the customer’s understanding of the risks they face.

The success of reform should therefore be assessed through broader outcomes: whether more people and businesses are adequately insured, whether coverage gaps reduce, whether claims outcomes improve and whether insurance becomes more accessible to underserved segments.

This is particularly important in commercial insurance, where risks differ significantly across industries and businesses. The insurance needs of a small manufacturer are different from those of a renewable energy company, logistics operator or large infrastructure project. Their exposures, contractual obligations, risk-management practices and potential losses vary. Their requirements cannot always be addressed through a simple comparison of products and premiums.

The industry must therefore ensure that the pursuit of simpler and more efficient distribution does not inadvertently weaken customers’ ability to make informed decisions. Making insurance easier to buy is important. Making sure customers buy the right insurance is even more important.

This requires insurers to develop products that are easier to understand and appropriate for the risks being covered; distribution systems that help customers identify their requirements and understand material exclusions and limitations; and customers who look beyond the premium to ask whether the cover is adequate. Regulation can support this process by encouraging meaningful disclosures, appropriate product recommendations and better measurement of customer outcomes.

The real test of reform

India needs higher insurance penetration, but penetration alone cannot be the ultimate measure of progress. A country can sell more policies without necessarily reducing its protection gap. The more relevant question is whether households and businesses are becoming better protected against financial shocks.

Misselling must be addressed firmly. But eliminating misselling alone will not solve India’s insurance protection gap. We must also address misbuying — the purchase of insurance that leaves customers exposed to risks they believed were covered.

The two problems require different, though complementary, solutions. One demands appropriate selling practices and accountability. The other requires better risk awareness, clearer products and a stronger focus on the adequacy of cover. If India’s insurance reforms are to deliver lasting value, we must move beyond the question of how efficiently insurance is sold and focus equally on whether customers are buying what they actually need.

(Amit Goel is Director, Equirus Raghnall Insurance Broking. The views are personal.)