Regulator seeks to make insurers have clear policy for agents' commission

Boards will make written norms that will be reviewed annually, says draft IRDAI proposal

The insurance regulator has proposed a cap on commissions paid by the health and general insurance companies at 20 per cent of gross written premium (GWP) -- a plan that could impact health insurers because their commissions are much higher than the prescribed limit. According to industry players, general insurance firms’ commissions are around 20 per cent of GWP.

This comes after the Insurance Regulatory and Development Authority of India’s (Irdai’s) move to cap non-life insurers’ expenses of management at 30 per cent of GWP.

According to the draft norms released on Wednesday, insurance companies need to have a board-approved policy on commissions, remuneration, or reward paid to agents and intermediaries, which will be reviewed annually based on the experience.

For life insurance companies, the regulator has proposed to link commissions with expenses of management (EoM). If the actual EoM in the previous financial year is not exceeding 70 per cent of the allowable EoM limits, then the life insurer can adopt commission limits as approved by its board. But if EoM is exceeding 70 per cent of the allowable limits, then the insurer must adhere to caps on commission proposed by the regulator. 

Irdai has said the maximum commission, as a percentage of premium, allowed for single premium life products is 2 per cent. It’s 0.5 per cent for group fund-based products and 20 per cent for regular premium or limited premium payment, including deferred annuity/pension products. Some additional commission can also be paid based on the number of years the policy is in force, the regulator has proposed.

According to the exposure draft, for general insurers, the maximum commission, remuneration, or reward paid for general insurance products cannot exceed 20 per cent of GWP in that particular financial year. And the same will hold true for health insurance products offered by standalone health insurers.

“Currently, the commissions vary according to the lines of business. Each line of business has a way of calculating it. Irdai is trying to simplify this by putting a composite limit on the commissions like what they have done in the case of expenses of management. Directionally, it is a positive move, which will benefit the industry,” said Rakesh Jain, CEO, Reliance General Insurance.

Generally, for retail products, the commission paid is around 20 per cent, while for health, it is slightly higher, people in the know said.

Life insurance industry insiders say that large companies, as well as bank-led companies, would be having lower EoM and, as a result, be at an advantage over smaller, non-bank-promoted companies. This is because they could, possibly, pay higher commissions to agents, given they can follow board-approved limits. But smaller companies, which generally have higher EoM, are likely to get impacted adversely as they would have to adhere to the caps prescribed by the regulator, which may be restrictive for them.

The regulator has said the board-approved policy on commissions to agents and intermediaries should result in enhancement of their performance in a manner that increases insurance penetration and density in the country; is in the interests of the policyholders; commensurate with the company’s business strategy; brings cost efficiencies in the conduct of business and simplification of the administration of insurance business; and gives an indication on the relative degree of importance placed on each of them.

The regulator is seeking to review the existing guidelines on how commissions, rewards, or remuneration is paid to the insurance intermediaries and has come out with this exposure draft seeking comments from stakeholders, if any, by September 14.

The objective is to enhance responsiveness of the regulation to market innovation and provide insurers the flexibility to manage their expenses based on their growth aspirations and the ever-changing insurance needs with an objective to improve insurance penetration. Further, the regulator wants to facilitate insurers in developing new business models, products, strategies, internal processes, and enable easy compliance with the regulations.

These new norms, when they come into effect, will not be applicable to insurance products under the Irdai (Micro Insurance) Regulations, 2015, and such other insurance products as may be specified by the regulator from time to time.

They will also not be applicable to policies that are procured directly by an insurer. Hence, insurers should necessarily grant discounts in the premium for such policyholders according to their board-approved policy, the regulator said.

As for government insurance schemes, the maximum commission or remuneration payable under such schemes will be specified in the government scheme/notification.

On the cards

• Insurance firms need to have a board-approved policy on commissions and remuneration paid to agents and intermediaries
• For life insurance companies, commissions to be linked with expenses of management
• For policies directly procured by an insurer, no commission must be paid to agents
• Govt will notify the commissions to be paid under govt insurance schemes