Introduction
Changes introduced by draft regulations
Comment
The commission, remuneration and rewards payable 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 have historically been strictly regulated in terms of the amounts and manner of payment. In this regard, Indian insurance companies have always been restricted from paying any commission, remuneration or reward for each policy sold in excess of the amounts specified under the applicable insurance laws.
Over nearly two decades, a number of representations have been made and recommendations shared for:
- rewards to insurance agents and intermediaries to be introduced; and
- the strict limits on commission or remuneration to be lifted or otherwise amended to give insurance companies flexibility in terms of the amounts payable.
Certain reforms on commission structures were introduced over time, such as bonuses for insurance agents. Later, on 15 April and 14 December 2016, respectively, rewards were introduced for insurance agents and insurance intermediaries, where the capping on rewards was, broadly, on the basis of the overall commission and remuneration paid to the respective eligible entities, rather than at a per-product level as otherwise applicable for commission and remuneration.
In terms of the commission and remuneration limits, a number of recent press reports have indicated that the regulator was considering significant changes to the existing framework for commission, remuneration and rewards to insurance agents and insurance intermediaries. On 23 August 2022, the Insurance Regulatory and Development Authority (IRDAI) released an exposure draft of the IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations 2022 (the draft regulations) which propose to, among other things:
- lift the strict commission and remuneration limits specified(1) under the IRDAI (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations 2016; and
- permit insurance companies to effectively self-regulate the amounts payable to insurance agents and insurance intermediaries through the policy approved by their board of directors.
The objectives of the draft regulations are to promote the "development of new business models, products, strategies and internal processes" and to provide flexibility to insurance companies "to manage their expenses", along with the longstanding objective of improving insurance penetration.
Changes introduced by draft regulations
The proposed key changes in the draft regulations are as follows:
- The draft regulations propose to merge the definition of "commission" and "remuneration" for the compensation payable to insurance agents and insurance intermediaries for the solicitation and procurement of insurance business.
- The draft regulations require every insurance company to have an "explicitly written policy" for the payment of commission or remuneration and rewards to insurance agents and insurance intermediaries, which shall be approved by the board of directors and reviewed annually "based on the experience".
- The draft regulations propose that the maximum commission or remuneration and reward payable by insurance companies must be in accordance with the following rules:
- for life insurance (including health insurance products offered by life insurers – if the actual expenses of management (EOM) in the preceding financial year do not exceed 70% of the allowable EOM limits, the life insurer can choose (with the due approval of the board of directors) to apply the commission limits set out in Schedule I to the draft regulations or apply the commission limits set under the board-approved policy. Alternatively, if the actual EOM in the preceding financial year exceeds 70% of the allowable EOM limits, the life insurer is required to comply with the limits set out in Schedule I to the draft regulations;
- for general insurance (including health insurance products offered by general insurers) – the maximum commission or remuneration and rewards "shall not exceed 20 percent of the gross premium written in India in that financial year"; and
- for health insurance offered by standalone health insurers – the maximum commission or remuneration and rewards "shall not exceed 20 percent of the gross premium written in India in that financial year".
- The draft regulations also set out rules in terms of the objectives of the board policy and the minimum requirements to be stated in the board policy, including:
- the manner and conditions of payment of commission or remuneration and rewards to insurance agents and insurance intermediaries;
- a schedule setting out the maximum commission or remuneration for insurance agents and insurance intermediaries, respectively, as a percentage of the premium under each line of business;
- renewal commission (if any) post termination of insurance agents and hereditary commission in the event of the death of an insurance agent;
- specific criteria for payment of first year, renewal, single and additional commission or remuneration and rewards to insurance agents or insurance intermediaries "with respect to every product";
- the manner and conditions for transfer of orphan policies;
- the grounds and manner for termination, suspension and cancellation of appointment of insurance agents and insurance intermediaries; and
- any restrictions on the products to be sold by any insurance agents or insurance intermediaries.
- The draft regulations further specify that if a policyholder directly procures an insurance policy from an insurance company, no commission or remuneration can be paid on such policy to any insurance agent or insurance intermediary, and in such cases, the insurer shall necessarily grant a discount on premium as may be specified under its board-approved policy.
The IRDAI has requested comments from stakeholders on the proposed draft regulations by 14 September 2022.
While the overhaul proposed through the draft regulations appears to have been largely welcomed by various industry stakeholders, if implemented in its present form, the scope of the self-regulation that will be adopted by insurance companies and the impact, if any, that its implementation may have on individual insurance agents as well as larger players such as insurance brokers, corporate agents, web aggregators and insurance marketing firms remains to be seen. The increased flexibility on expenses and relatively relaxed compliance requirements for insurers is also likely to impact the prevalent commission and remuneration structures in the Indian market, as well as, perhaps, the prevalent product pricing.
For further information on this topic please contact Celia Jenkins or Anuj Bahukhandi at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected] or [email protected]). The Tuli & Co website can be accessed at www.tuli.biz.
Endnotes
(1) Regulation 5 currently reads as follows:
5. Commission to Individual Insurance agents, remuneration to insurance intermediary
(a) The commission or remuneration to be paid to an insurance agent or an insurance intermediary shall be decided by the insurer based on its Board approved policy.
(b) The maximum commission or remuneration payable under life insurance products including health insurance products offered by life insurers is given in Schedule I.
(c) The maximum commission or remuneration payable under health insurance products offered by general insurers or stand-alone health insurers is given in Schedule II.
(d) The maximum commission or remuneration payable under general insurance (other than motor) products offered by general insurers is given in Schedule III.
(e) The maximum commission or remuneration payable under general insurance (motor) products offered by general insurers is given in Schedule IV.
(f) The maximum rate of commission or remuneration payable by an insurer shall not exceed either:
(i) The maximum specified by these regulations; or
(ii) Any other rate of commission or remuneration approved by the Authority under any other Regulations or Guidelines whichever is lower.