IRDAI’s new rules on commissions give cos flexibility

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The insurance regulator’s new norms on commissions give insurance companies more flexibility while streamlining payments to agents and incentivising higher ‘persistency ratios’. However, the focus on maintaining a certain threshold of expenses could benefit larger players who have a wider business with deeper banking relationships and could also disincentivise small agents from selling policies, industry executives and analysts said.

Persistency ratio shows how many policyholders paid their renewal premium.

In a draft notification earlier this week, the Insurance Regulatory and Development Authority of India (IRDAI) set a 20% commission cap for general insurance companies, down from the 30% to 35% they could charge earlier. The regulator also allowed life insurers whose expenses were under 70% of the allowable limit to set their own commission rates across product segments.

For companies that are above the expenses threshold, the maximum commission allowed as a percentage of premium is between 2% and 20%, down from a peak of 40% earlier. More importantly, there is a built-in commission for premium payments in the 5th, 10th, and 15th years, which encourages higher levels of persistency from agents. Stakeholders have time till September 14 to give feedback.

CLSA analysts said insurance companies with a higher operating expenses (opex) may see a cut in commission cap in guaranteed products. “Large private sector life insurance companies like

and have opex that is less than 70% of allowable expenses. They will have full flexibility on commission structuring. Insurers with expenses that exceed 70% of allowable expenses may face some constraints on the payouts they make for long-duration products like non-PAR savings,” CLSA said.

However, lower commissions do not mean benefits to consumers. “From consumers’ perspective, this draft guideline may not change anything. Unless consumers see the commissions being paid and switch to direct purchase, they won’t benefit from reduced policy premium pricing,” said Srinath Sridharan, co-founder of 4P Consulting.

Some industry executives said such stringent focus on expenses will only help the big companies and could also disincentivise agents from selling policies. “Large companies with banking relationships will improve their profitability. The big will get bigger. Though efficiencies will improve, some small agents may decide against selling life insurance,” said a senior private sector executive.

The sharp cut in the first year premiums in life and health insurance will drive small agents away, said an executive from an insurance broker. “Agents spend significant time in understanding consumer needs in life and health insurance, which are advisory in nature. Rebating issues will crop up leading to malpractices if there are different prices for the same product.”

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