In a recent circular, the Insurance Regulatory Regulatory and Development Authority of India (Irdai) has laid down guidelines on how insurers should have a clear and transparent board policy regarding their commission structures. Insurance distributors play a vital role in reaching policies to the masses. Yet it’s seen that they tend to push products with high commissions. This leads to the mis-selling of insurance.
The Irdai requires insurers' board policies to have at least the following elements.
Clear Objectives And Principles: The board policy must clearly state the goals and principles behind the commission structure. It should encourage fair competition among intermediaries so that the incentives are aligned with the needs of the customer and at the same time promote cost-effective distribution.
The Board Policy Should Be Fair And Reasonable: The commission system should be reasonable and not lead to excessive compensation for intermediaries at the cost of the customer. Insurers need to ensure commissions match the work needed to gain and maintain the given line of business so that intermediaries are rewarded effectively.
Good Distribution Practice: The board policy should prioritize good distribution practices. This will enhance customer satisfaction, help build a better relationship with customers, and boost the insurer's market presence.
Regular Review: A regular evaluation process needs to be set up that measures effectiveness, impact on premiums, benefit payouts and penetration, market reach, and ensuring alignment with customer needs. The audit committee needs to conduct such as review at least once every year.
Here are ways this circular could lead to a change in premium:
Impact On Premium: According to experts, The recent issuance of the 'Master Circular on Expenses of Management, including Commission, of Insurers, 2024' by the Irdai attempts to enforce fair and reasonable commission structures thereby reducing excessive payouts. This circular aims to create cost efficiencies that could result in more competitive premium rates over time.
Aditya Mall, appointed actuary, Future Generali India Life Insurance Company said, “The impact of this regulation extends beyond premium adjustments. It mandates insurers to establish transparent, board-approved commission policies that align intermediary incentives with customer interests, fostering ethical conduct. Regular reviews and stringent oversight will help insurers optimize expense management, ensuring compliance and adaptability to market conditions. Enhanced governance and detailed reporting will increase accountability and transparency, contributing to a more trustworthy and customer-centric insurance industry. This initiative marks a significant step towards a balanced and fair insurance ecosystem.”
According to Sharad Mathur, Managing Director & Chief Executive Officer, Universal Sompo General Insurance Company, the recent circular is a significant step forward for the insurance industry. It ushers in a new era of transparency and efficiency, benefiting both insurers and policyholders. “We view this as a catalyst for positive change. The circular promotes fair commission structures, leading to potentially lower premiums for our customers. It also mandates clear, board-approved policies, ensuring intermediaries act in their best interests. This focus on ethical conduct and strong governance minimizes conflicts and builds trust. Regular reviews and oversight, as outlined in the circular, are crucial for continuous improvement. We are committed to optimizing our operations while adapting to market changes. This circular marks a turning point for the insurance landscape. It promotes fairness, and transparency, and empowers customers. By embracing these changes, we remain dedicated to providing exceptional value and unwavering protection,” he said.
The commission is decided upon various factors such as the popularity, demand, and features of the product. The commissions will now be based on the product rather than being rigid. “The popularity of the product and other factors will decide if the commission will be high or will it be saving the insurers from unnecessary expenses which earlier was fixed leading to high commissions for mediocre products. Hence, setting up a reasonable commission structure where the intermediaries are not compensated highly because of their bargaining power but solely for their efforts, will let the insurers plan better insurance policies with lower premiums,” Naval Goel, founder and CEO, PolicyX.com, a insurance web aggregator said.
