Insurers urge IRDAI to act against automotive dealers’ ‘steep commissions, restrictive practices’

Insurance companies want IRDAI to ensure that automobile manufacturers’ linked dealers and MISPs show customers all the available premium quotes that insurers offer, rather than giving them access to insurers and policies handpicked by them solely on the basis of commissions. They have proposed an open architecture structure to be allowed, where motor dealers can work with multiple insurance companies in order to give choice to customers. “Another measure that needs to be implemented is real-time pricing where customer and vehicle data is passed on to the insurers on a real-time basis. Each company can then quote what they think the right price is based on their own understanding of the risk and thus enhance competition,” said another insurance official.

Insurance officials say there is an ongoing discussion in the industry around fixing the MISP structure in the motor insurance space, which commands a 30 per cent market share in the general insurance sector, with the own damage segment accounting for a share of 12.41 per cent. “From the insurance industry’s point of view, it is not a good situation to be in — insurance companies are forced to sell own damage policies through this channel. It is a costly affair for insurers and customers have to incur a high cost in the form of expensive premiums,” said a Chief Executive Officer (CEO) of another general insurance company.

Higher commissions push up premiums for new car buyers, who buy insurance policies at the time of vehicle purchase. “The forced selling of insurance policies by MISPs at their specified rates leads to the customer having to shell out a lot more premium than she otherwise would have. The difference in premium for policies offered by MISPs and premium for policies offered by external insurance brokers. For example, an MISP may ask for an insurance premium of Rs 50,000 on a Rs 10-lakh car whereas if the same policy were to be procured from the market, it would cost Rs 20,000,” said Pranjita Barman, a partner with law firm Cyril Amarchand Mangaldas.

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Insurance regulator in the know

At a meeting with general insurers in October, IRDAI officials had, in the presence of chairman Debasish Panda, highlighted higher commissions of up to 53 per cent being paid out to MISPs on new private cars.

One view on this issue is that insurers can do little on this front and it is only the regulatory body that can impose penalties on these entities, in line with the existing MISP norms, and force them to rein in such high-handed tactics. “The commissions that some MISPs charge at present are exorbitant…and completely against the interests of insurers as well as policyholders. Put simply, insurers pass on commissions to policyholders in the form of higher premiums, so effectively, the money is going out of their pockets,” said the senior official quoted earlier.

However, there are others who are hopeful that the IRDAI will soon take steps to resolve the conundrum, as it is a matter that affects retail customers directly.

In 2019, the regulator had, in fact, imposed a penalty of Rs 3 crore on Maruti Insurance Brokers on various counts, including denial of cashless claims to customers who chose not to purchase or renew their car insurance through the entity. It also took punitive action against Hero Insurance Broking and slapped a penalty of Rs 2.18 crore for creating its own panel of insurers, which effectively resulted in restricted choice of policies and companies for policyholders.

"It is high time the IRDAI abolished the OEM-linked broking system and forced insurers to declare commissions above 20 per cent of the premium on the face of the policy. This should be done for all the products (life, health, all general insurance products) and channels. OEM brokers and bancassurance channels are among the worst when it comes to very high commissions and forced selling to customers," said an industry insider on condition of anonymity.

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Push from the General Insurance Council

In 2023, the industry body General Insurance Council had recommended amendments to the existing MISP guidelines, mooting a proposal to allow policyholders to choose from five to 15 insurers.

“Pricing and underwriting decision should be fetched directly from the insurer’s system through system integration [API or on a real-time basis]. OEM/OEM brokers should not lock any insurers’ log-ins, except on account of customer service issues. The customer should be shown all the available quotes and the order of the quotes should be basis the price…along with the service/performance rating for the insurance company,” stated a letter sent by GI Council to the IRDAI, a copy of which Moneycontrol has accessed. It also recommended that motor dealers or broker platforms must give customers the option to buy policies directly from insurers of their choice.

Barman says that while IRDAI's 2017 guidelines are applicable to MISPs, they are not regarded as intermediaries. "Hence, they are not required to register with the IRDAI. Although the regulator has given itself the power to cancel the appointment of MISPs by brokers, it has been sparsely used - the IRDAI chooses to penalise brokers instead. The guidelines are therefore, fall short of being called effective regulations," she said.

According to her, bringing MISPs within the IRDAI's regulatory purview, by designating them as an insurance intermediary, is the first step towards resolving this conundrum. "In March 2024, the IRDAI has already put in place an inclusive definition of mis-selling which, among others, include ‘exercising undue influence, use of dominant position or otherwise’. We believe that once IRDAI brings MISPs within the regulatory purview, the IRDAI can effectively take actions against such malpractices," she said.