Although direct plans are common in mutual funds that allow investors to buy an investment plan without the help of a distributor or agent, such options were previously unavailable in the insurance sector. The Insurance Regulatory Development Authority (IRDAI) has now given its nod, bringing the new rule to effect on April 1, 2023. So it is vital to understand what these plans are.
Such an option allows the customer to buy a plan directly from an asset management company (AMC), allowing the buyer to save more on the product.
In a gazette notification, IRDAI said: “Every insurer shall have a well-documented policy approved by its board on an annual basis, which shall specify the manner of transfer of benefits, arising from reduction of expenses or directly sourced business to the policyholder by way of reduction in premium.”
Chenthil Iyer, founder and chief strategist at Horus Financial Consultants, explains: An insurance company imposes costs on their insurance policies in two ways, administration charges and mortality charges.
In the case of unit-linked insurance plans (ULIPs), there is also a fund management charge as ULIPs invest in market-linked funds.
Iyer says that insurance companies “strongly believe” people do not buy an insurance policy on their own and, therefore, must be sold. So they depend heavily on insurance agents and reward them handsomely through commissions. This commission forms a major chunk of the administration charges levied by them.
However, times have changed, and with increased awareness, more people are approaching insurance companies directly to buy insurance policies for themselves. “However, until a few years ago, those customers were forced to buy policies through agents since they didn't have a mechanism to accept proposals without an agent code. Many insurance companies realised this need and launched direct plans for products such as term insurance. But somehow IRDAI figures that they don't pass on the entire savings in agent commissions to the customers in the form of reduced premiums or enhanced returns on the policies,” says Iyer.
To ensure the complete transfer of these savings in expenses to customers who voluntarily buy insurance from these companies, IRDAI has introduced this new regulation.
As per the IRDAI guidelines, insurance companies are allowed to sell insurance policies directly to policyholders without the involvement of intermediaries such as agents or brokers.
In such cases, the expenses of management, which include the commission payable to agents, are reduced. However, until now, insurance companies were not required to pass on this benefit to the policyholders in the form of a reduction in premium.
The recent clarification by IRDAI implies that insurance companies will now have to reduce the premium for policies bought directly from them by passing on the benefit of decreasing management expenses. This move aims to promote direct sales by insurance companies and provide more value to policyholders.
It is important to note that the extent of reduction in premium may vary depending on the type of policy and the insurance company. Therefore, policyholders are advised to compare policies and premiums from different insurance companies before purchasing one.