Last week, the Insurance Regulatory and Development Authority of India (IRDAI) notified three new rules that are likely to have material economic implications for market participants, both insurers and intermediaries. In the process, the regulator replaced the erstwhile regime of ‘product-wise capping’ of commission payable to intermediaries. This is, however, subject to insurers maintaining overall ‘expenses of management’ (EOM) limits set by the IRDAI.
Besides the IRDAI (Payment of Commission) Regulations, 2023, the regulator notified the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2023 and the IRDAI (Expenses of Management of Insurers transacting Life Insurance business) Regulations, 2023.
In a simultaneous overhaul of the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2023, the regulator has taken a simplistic approach, allowing general insurers to incur EOM up to 30 percent of gross written premium in India in a financial year, while standalone health insurers are allowed to incur EOM up to 35 percent of gross written premium in India in a financial year. By introducing a single limit, basis the total gross written premium of the general and health insurer, the new regime has removed the erstwhile segmental product-based calculation of allowable limits.
For life insurers, the IRDAI (Expenses of Management of Insurers transacting Life Insurance business) Regulations, 2023 is a rationalised version of the erstwhile regime. It provides for the aggregation of separate allowable limits depending on the gross written premium received on different life insurance products. Owing to the complexity (and significance) of the life insurance industry, the IRDAI has maintained a reasonable product-based segmental approach for EOM limits of life insurers.
Over and above the aforesaid limits set out under the EOM Regulations, the IRDAI has allowed additional limits for expenses in relation to setting up of foreign branches, setting up of branches in the international financial services centre, the rural and social sector, government insurance schemes, insurtech and insurance awareness. Allowing additional limits for expenses of management will incentivise insurers to focus on enhancing insurance penetration, which is the primary developmental goal.
Boost For Bancassurance Channel
The changes are likely to have a positive impact on thebancassurance channel, led by private banks (which are the largest distributors of insurance products) in the capacity of corporate agents. Commission income from distributing insurance products can go up to 15 percent of the total income of banks. With the removal of commission caps at a product level, banks with established bancassurance channels are likely to expand their distribution business to boost revenue. This ties in well with the ability of corporate agents to now distribute products of up to 27 insurers (compared to nine previously). These changes are likely to overhaul the commercial arrangements between insurers and brokers as well, with brokers getting paid higher rates of commission for selling particular products.
The removal of commission caps will make it viable for intermediaries to distribute motor third-party products and products in the rural and social sectors to low-income groups, an area where the industry is struggling to increase penetration. This will aid the insurers in achieving their obligations in relation to the motor third party and rural and social sector as envisaged by the Parliament in Sections 32B and 32D of the Insurance Act, 1938 (and the accompanying IRDAI regulations).
Little impact on premiums
Though an increase in commissions may be seen as a factor directly contributing towards the increase in the pricing of products, given the price-sensitive and highly competitive Indian market, overall premiums are unlikely to be significantly impacted because of this change. Further, the IRDAI may monitor the market to avoid such a situation where policyholders end up paying significantly higher premiums on account of uncapped commissions.
These changes signify a move towards a more liberalised regime, to further the stated objective of providing flexibility to insurers to manage their expenses within the overall limits, based on their gross written premium. It is evident that as long as an insurer maintains financial hygiene, it is free to determine the extent of commission it wishes to pay to its intermediaries. Such liberalisation will help intermediaries and insurers to enter into more viable arrangements and increase penetration.
Indranath Bishnu is a partner and Shravan Belsare is an associate at Cyril Amarchand Mangaldas, Mumbai. Views are personal, and do not represent the stand of this publication.
