Historically, the insurance statutory and regulatory framework has strictly restricted the amount of commission or remuneration that could be paid to insurance agents and insurance intermediaries (eg, insurance brokers, corporate agents, web aggregators and insurance marketing firms) for the solicitation and procurement of insurance business. In addition to the overall commission caps contained in Section 40A of the Insurance Act 1938, regulations and guidelines(1) applicable to insurance intermediaries imposed restrictions on the amount of commission and remuneration payable to insurance intermediaries.
For life insurance products, the Insurance Regulatory and Development Authority (IRDA) (Linked Life Insurance Products) Regulations 2013 and the IRDA (Non-Linked Insurance Products) Regulations 2013 (collectively, the 'Products Regulations') also imposed 'product-wise' restrictions on the commission payable to insurance agents and insurance intermediaries.
However, the Insurance Laws (Amendment) Act 2015 omitted Section 40A of the Insurance Act 1938, setting out the framework for the commission and remuneration limits to be revised. In the interim, life insurers were still restricted to the limits specified in the Products Regulations for products being launched or the limits set out in the IRDAI file and use guidelines for existing products, while general insurers were restricted to the commission limits notified by the IRDAI through its circulars.
Following the promulgation of the Insurance Laws (Amendment) Act, there was widespread debate within the insurance industry on whether the commissions paid to intermediaries should continue to be capped or whether a free market approach should be followed.
The IRDAI appears to have clarified its approach through the release of the draft IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations 2016. The draft regulations clarify that commission and remuneration paid to insurance agents and insurance intermediaries will continue to be regulated and subject to the limits specified by the IRDAI.
In accordance with the draft regulations, insurers cannot pay insurance agents or insurance intermediaries commission or remuneration in excess of the limits specified therein. Schedules I to V of the draft regulations specify separate maximum limits for various types of life insurance, health insurance and general insurance products.
Further, insurers cannot pay insurance agents or insurance intermediaries any rewards in excess of the amounts specified in the draft regulations. In this context, the draft regulations define 'reward' as:
"amounts paid, whether directly or indirectly, as an incentive by whatever name called by an insurer to the insurance agent or the insurance intermediary towards benefits such as gratuity, term insurance cover, group life insurance cover, group personal accident cover, group health insurance cover, telephone charges, office allowance, sales & promotion gift items and such other items."
Insurers must have a board of directors-approved policy in place in relation to the payment of commission, remuneration and rewards to insurance agents and insurance intermediaries. The policy should seek to use insurance agents and insurance intermediaries in a manner which:
- increases insurance penetration and density;
- corresponds with the insurer's business strategy; and
- increases cost efficiencies and simplifies the administration of insurance business.
Further, the policy must include:
- the manner and conditions for paying:
- commission or remuneration to insurance agents and insurance intermediaries; and
- renewal commission and hereditary commission to insurance agents or their legal heirs after termination of the insurance agency;
- the manner and conditions for paying rewards to insurance agents and insurance intermediaries which are "over and above the commission or remuneration", but not in excess of:
- 20% of the first-year commission payment or remuneration in case of individual insurance agents; or
- 40% of the first-year commission payment or remuneration in case of insurance intermediaries;
- the manner and conditions regarding the transfer of orphan policies;
- the manner and grounds for terminating, suspending or cancelling the appointment of insurance agents and insurance intermediaries; and
- any restrictions on the products sold by insurance agents or insurance intermediaries.
The policy must be reviewed annually and any changes must be filed with the IRDAI within 30 days.
The draft regulations supersede the commission limits specified in the Products Regulations for new products. However, for all existing products, the limits set out in the Products Regulations and those contained in the IRDAI file and use guidelines for general insurers will continue to apply.
The draft regulations clarify that where policies are procured directly by the insurer, no commission or remuneration is payable. This leaves open the question of whether any commission, remuneration or reward is payable on products designated as online products which are attributed to the insurer's direct channel, but may be displayed on a broker or web aggregator's website.
Insurers must file a return in the specified format for all commission, remuneration and rewards paid each financial year. Returns must be certified by the chief executive officer, chief financial officer, chief compliance officer and statutory auditors of the insurer.
The IRDAI had sought comments from stakeholders on the draft regulations and appears to be aiming to implement these regulations by April 1 2016. Press reports indicate that the draft regulations have received mixed responses from the insurance industry. While some stakeholders view the proposed payment structure as more liberal compared to the earlier regime, others believe that there is scope for further liberalisation and that the opportunity to clarify certain remaining issues should be seized.
For further information on this topic please contact Celia Jenkins at Tuli & Co by telephone (+91 11 2464 0906) or email (Celia.Jenkins@tuli.co.in). The Tuli & Co website can be accessed at www.tuli.biz.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.