The Insurance Regulatory and Development Authority of India (IRDAI) on May 15, 2024, issued a master circular, with guidelines for commission payments to insurance agents and intermediaries. From its erstwhile rule-based framework, IRDAI has shifted towards a principle-based regulatory framework, allowing more flexibility for insurers while clearly outlining how to align commission payouts with policyholders' interests.
Underpinning the new principle-based framework is permission for insurers to tailor commission structures and management expenses to better suit their individual working situation. As of now, stand-alone health insurers and general insurers can pay 35 per cent and 30 per cent of their total premiums as management expenses including commissions.
Board Approved Policy: “As the insurance agents and insurance intermediaries play a crucial role in the distribution of insurance products, it is essential for the insurers to have a clear and transparent board policy on their commission structure to ensure fairness, transparency, compliance in the insurance distribution process," the master circular said.
The policy should state the objectives and principles governing the commission structure. The structure should promote fair and transparent competition among intermediaries, align incentives with customer needs and encourage efficient and cost-effective distribution
Regular review: The standard review process for the commission structure must be done by the audit committee at least on an annual basis, to assess the commission structure's efficiency, impact on premium rates, benefit pay-outs, penetration, alignment with customer needs and interests etc. Any new commission structure shall not apply to already sold policies.
Reasonable Commission: The commission structure shall be commensurate with the efforts required to acquire and sustain that type of business and not result in excessive compensation for intermediaries regardless of their size or bargaining power at the expense of customers or the insurer, the master circular said.
Experts feel that the regulatory reforms will lead to more competitive premium rates for consumers. If the industry heeds IRDAI's call for fair and reasonable commission structures, the instances of excessive payouts to intermediaries will ween, leading to cost efficiency, and thus lower premiums for policyholders.
Rahul M. Mishra, Co-Founder and Director at Policy Ensure, said, "The new norms put forward by the IRDAI on commissions related to insurance agents and intermediaries are expected to lower the insurance premiums and make the products more viable in the market. By bringing these regulations, IRDAI seeks to help lower the overall cost pressures on insurers."
"However, insurers must balance lower commissions with maintaining service quality provided by intermediaries. Adequate remuneration is necessary to ensure intermediaries remain motivated and efficient. If insurers successfully minimise operating costs without compromising service quality, existing policyholders could enjoy lower premiums," Mishra further said.
"For new buyers, this means wider access to an array of insurance products at cheaper costs as it will be accommodating to price-conscious consumers. The function of competitive pricing can also create pressure to improve the coverage and the value-added services since the insurers will be in a competition marketing their products to the customers," Mishra added.
