Impact of Revised IRDAI Guidelines on Commissions

Introduction

Insurance organizations need to comply with guidelines outlined by the Insurance Regulatory and Development Authority (IRDAI) concerning commissions paid on the sale of insurance products. Over the years, the amounts and methods of payment of commission/remuneration and rewards paid to insurance agents and intermediaries (such as insurance brokers, corporate agents, web aggregators, and insurance marketing firms) for soliciting and acquiring insurance business have been strictly regulated. In this regard, it has always been prohibited for Indian insurance companies to pay any commission, payment, or reward for each policy sold in excess of the amounts permitted by applicable insurance legislation.

Over the past couple of decades, there have been a plethora of arguments made and suggestions made for (a) the introduction of commissions for insurance agents and intermediaries and (b) the lifting or other modification of the strict commission /remuneration limits given to insurance companies, ensuring more flexibility in terms of the amounts payable. Over time, a few adjustments were made to commission structures, including introducing bonuses for insurance agents and rewards for insurance intermediaries on April 15, 2016, and December 14, 2016, respectively.

Regarding the commission and remuneration limits, the IRDAI recently released an exposure draft on "IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations, 2022" of August 23, 2022 ("Draft Regulations"), following several press reports indicating that the regulator was considering significant changes to the existing framework for commission, remuneration, and rewards to insurance agents and insurance intermediaries.

The main objective of these regulations is:

1. To make regulations more responsive to market innovation.
2. To make it easier for insurers to comply with rules/regulations while achieving regulatory goals by assisting them in developing new business models, products, strategies, and internal processes.
3. Give insurers the freedom to manage their costs/expenses per their goals for expansion and the constantly shifting insurance requirements to increase insurance penetration.

Proposed Changes

The following is a description of the major changes that are suggested in the Draft Regulations by IRDAI:

1. In the Draft Regulations, it is suggested that the terms "Commission" and "Remuneration" be combined/ merged to refer to the remuneration paid to insurance agents and insurance intermediaries for soliciting and procuring new insurance business.
2. According to the Draft Regulations, each Insurance Company must have an "explicitly written policy" approved by the Board of Directors and reviewed every year, based on experience, for the payment of commission or other compensation and benefits to insurance agents and insurance agent intermediaries.
3. The proposed Draft Regulations state that the following norms must be met by the insurance companies for maximum commission or remuneration and reward payable:

a) For life insurance organizations (including health insurance products offered by Life Insurers):

i) if actual Expenses of Management (EOM) in the prior financial year did not exceed 70% of the allowable Expense of Management limits, then the Life Insurer can choose (with the proper 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

ii) if the actual Expenses of Management (EOM) in the prior financial year exceeds 70% of the allowable EOM limits, the insurer must comply with the limits as per Schedule I for the financial year.

b) The maximum commission or remuneration and rewards for general insurance (including health insurance products supplied by General Insurers) shall not exceed the EoM limits specified by the regulator.

c) The maximum commission or remuneration and rewards for health insurance offered by standalone health insurers shall not exceed the EoM limits specified by the regulator.

Note: IRDAI draft norms do away with specific caps on commissions to agents and intermediaries that it had proposed in an exposure draft in August.

For general insurers, the regulator has proposed an EoM limit of 30% of gross written premiums written in that financial year and 35% for standalone health insurers. These are updates under the revised EoM guidelines, which will take effect on 1st April 2023.

1. The Board-approved policy must at least specify the following information when paying commissions, rewards, or other compensation to insurance agents and insurance intermediaries:

i) The manner and situations regarding payment of commission or remuneration to insurance agents and insurance intermediaries, rewards to be paid, etc.

ii) The schedule detailing the maximum commission or payment to insurance brokers and agents as a percentage of premium under each line of business, i.e., general insurance, health insurance, and life insurance business.

iii) Renewal commission (if any) upon an insurance agent's termination

iv) Hereditary commission in the event of an insurance agent's death.

v) Specific requirements for paying insurance agents or insurance intermediaries, first year, renewal, single and additional commissions or remuneration and rewards "with respect to every product."

vi) Conditions and procedures for orphan policy transfers.

vii) The reasons for and the steps taken to terminate, suspend, or cancel an insurance agent's or insurance intermediary's appointment.

viii) Any limitations on the goods that insurance agents and insurance intermediaries may sell.

1. The Insurance Regulatory and Development Authority of India (Micro Insurance) Regulations, 2015, and any other insurance products that the Authority may specify from time to time shall not be subject to these regulations. No commission or further compensation is due to insurance agents or intermediaries when policies are purchased directly by an insurance company. For such policyholders, as defined in the Board-approved policy, the Insurers must provide discounts on the premium. As specified by the government scheme/notification, the maximum commission or compensation is due under the Government Insurance Schemes offered provided by the insurers.

Final Thoughts

With these recent developments and changes proposed through the Draft Regulations by IRDAI, it's still unclear how insurance companies will adapt to it and if it will affect individual insurance agents and bigger players like insurance brokers, corporate agents, web aggregators, and insurance marketing firms. The common commission and compensation structures in the Indian market and, perhaps, the standard product pricing are likely to be impacted by the increased flexibility on expenses and relatively relaxed compliance requirements for insurers.

The above changes need to come into effect by April 1st, 2023. Organizations have a humungous task to absorb these changes, run simulations to understand the impact on their incentive programs, and come up with optimized changes to ensure both the insurer and the agents and intermediaries end up in a win-win situation. This is where platforms like Incentivate can help organizations model, test, and adapt incentive structures in line with evolving regulatory requirements. In addition, the current solutions deployed by them may not be ready to be updated before or in time with the beginning of the next financial year, i.e., 2023-24.