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 form a key part of the insurance ecosystem as they ensure that the policies reach the masses. However, it has been seen that distributors are often prone to selling those products that have a higher commission. This often leads to the miss-selling of insurance. The Irdai has mandated that the board policy of insurers should have at least the following elements.
Clear Objectives And Principles
The board policy shall clearly indicate the objectives and principles behind the commission structure. This shall incorporate promoting fair and transparent 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 structure should be rational and not lead to excessive compensation for intermediaries at the cost of the customer. Insurers should make sure that the commission structure is in line with the efforts required to acquire and maintain the given line of business so that intermediaries are rewarded effectively.
Good Distribution Practice: The board policy should focus on good distribution practices. This will improve customer satisfaction, help build a better relationship with customers, and increase the insurer’s market share.
Regular Review: A standard review process should be established that assesses effectiveness, impact on premiums, benefit payouts and penetration, and how it is aligned with customer interests. The audit committee should conduct such a review at least once every year.
In January, the Irdai released a consolidated regulation on expenses of management, including commissions, with the new regulations to come into effect from April 1, 2024. It said that the insurers could continue to offer a commission structure at the expense of management. For example, a life insurer who charged 100 per cent of the first-year premium as the expense of management, he/she could offer the entire 100 per cent as a commission to their agents or intermediaries.
Back in March 2023, the Irdai had replaced the individual cap on commission payments for both life and non-life insurers with an overall cap of total expenses of management of insurers. The insurers got more flexibility through this to manage their expenses.
