Indian insurance laws have traditionally restricted the distribution of insurance products to insurance agents and insurance intermediaries that have obtained the requisite licences and registration from the Insurance Regulatory and Development Authority of India (IRDAI). Section 40 of the Insurance Act 1938 (as well as various regulations issued by the IRDAI) strictly prohibits unlicensed persons from distributing insurance products and receiving any payment from an insurer for distribution of insurance products.
These prohibitions, while aimed at protecting the interests of policyholders, resulted in issues for insurers and insurance intermediaries in terms of accessing potential customers for certain lines of business – in particular, motor insurance products. In this regard:
- Section 146 of the Motor Vehicles Act 1988 makes it compulsory for third-party liability insurance to be obtained for all vehicles before they are placed on the road; and
- the policy wording for all motor insurance policies is governed by the terms and conditions issued by the erstwhile Tariff Advisory Committee. Insurers are now permitted to have some add-on covers and endorsements but, broadly speaking, these products remain fairly standard.
Therefore, unlike several other lines of insurance where penetration remains fairly low, most customers of new automobiles prefer to purchase motor insurance along with the vehicle itself and often have a fairly limited decision to make in terms of choosing the insurance product that they wish to purchase. With this background, over the years, insurers and insurance intermediaries have attempted to access these prospects, including by placing personnel in automobile dealerships and compensating the automobile dealership for the space used. However, in several instances, the IRDAI has raised questions over these arrangements – largely regarding the fact that unlicensed persons are involved in the solicitation and procurement of insurance business. This has led to a growing need to address the distribution of motor insurance at automobile dealerships.
The first step in terms of reform was in October 2015 when the IRDAI notified the Guidelines on Point of Sales Person (POSPs) to simplify the solicitation of insurance products which require limited underwriting. POSPs are individuals who can be engaged by either insurers or insurance intermediaries. Under the POSPs Guidelines, minimum qualifications (10th standard passed) are required and POSPs must be trained and certified by the insurer or insurance intermediary. Motor (comprehensive and third-party liability) products are among the products which POSPs can solicit. While this was indeed a welcome step aimed to increase insurance penetration in the country, certain logistic issues persisted as insurers and insurance intermediaries were still required to place POSPs within automobile dealerships, which led to these dealerships seeking compensation for usage of space and personnel.
In view of such complexities and surviving market practices, in November 2015 the IRDAI formed a seven-member committee to "bring clarity and transparency in pay outs made to the auto dealers by the insurers for getting motor insurance business".
Ultimately, on August 31 2017 the IRDAI notified the Motor Insurance Service Providers (MISP) Guidelines to identify and regulate the role of automobile dealers in distributing and servicing motor insurance products.
The key features of the MISP Guidelines are as follows:
- An 'MISP' is defined as an automobile dealer appointed by an insurer or insurance intermediary to distribute and/or service motor insurance policies of automobiles sold through such dealer. An MISP is consequently permitted only to distribute and service motor insurance policies. The phrase 'servicing of insurance business' has been defined to include receiving instructions from customers with respect to amending, endorsing, modifying, renewing and cancelling motor insurance policies, and guiding and assisting customers on insurance claims.
- The term 'automobile dealer' includes authorised dealers or sub-dealers of automobile manufacturers selling new or used automobile vehicles.
- The MISP must comply with the code of conduct prescribed under the MISP Guidelines while soliciting and servicing insurance policies. In order to ensure compliance, an MISP must nominate a designated person. The designated person, along with all persons soliciting and procuring insurance for the MISP, must trained and certified to at least the 12th level by the insurer or insurance intermediary. However, the ultimate liability for the acts and omissions of a MISP lie jointly with the MISP and the insurer or insurance intermediary engaging the MISP.
- Insurers and insurance intermediaries that seek to enter into an arrangement with an MISP must enter into a written agreement with the MISP. Further, the insurer or insurance intermediary must upload the relevant data regarding the MISP on the Insurance Information Bureau portal.
- The MISP Guidelines prescribe the maximum distribution fees that can be paid to an MISP by the insurer or insurance intermediary. Apart from the restrictions on the amount of distribution fee payable:
- the insurer cannot pay any remuneration or reward to an insurance agent or insurance intermediary on any policy which has been solicited by an MISP and in respect of which the MISP is being paid distribution fees; and
- MISPs and their associate companies have been strictly prohibited from directly or indirectly receiving from receiving any payment (by whatever name) from insurers, other than the distribution fee permitted under the MISP Guidelines.
- The remuneration paid by an insurer to an insurance intermediary or an MISP will be subject to a monthly audit to ensure compliance with the MISP Guidelines and the independent auditor's report must be reviewed by the insurer's audit committee. In addition, insurers and insurance intermediaries must put systems in place for the day-to-day monitoring of all the MISPs engaged by them.
- Any automobile dealers which already have an insurance intermediary licence or certificate must surrender their existing certificate of registration or licence and be re-certified in compliance with the terms of the MISP Guidelines.
The IRDAI's move to recognise the role of automobile dealers through the MISP Guidelines gives legitimacy to existing practices of solicitation and servicing of motor insurance by involving automobile dealers. However, as the MISP Guidelines permit both insurers and insurance intermediaries to engage MISPs, in the event that insurers chose to engage MISPs directly, the involvement of other insurance intermediaries in soliciting and procuring motor insurance products may effectively be minimised. Further, with the introduction of the POSP and the MISP Guidelines, and the legitimisation of distribution of insurance through automobile dealers, the other existing structures and practices in relation to automobile dealers will have to be dismantled.
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