IRDAI removes commission limit for agents: How will it benefit consumers?

What does the new IRDAI rule say?

IRDAI has asked insurance companies, including life and non-life, to fix an overall cap on commission to agents, brokers and other intermediaries, giving more flexibility to insurers in managing their expenses.

This means the regulator has replaced the earlier cap on different commission payments to various types of intermediaries with an overall board-approved cap which should be within the allowed expenses.

What is the objective?

This rationale of the regulation is to enable and provide flexibility to the insurers, both life and general insurers, to manage their expenses within the overall limits based on their gross written premium to optimally utilize their resources for enhancing benefits to policyholders.

How will this move benefit insurance companies and agents?

The insurance sector participants have welcomed the change in the regulation and termed it a major reform. They said the removal of the cap on commission payments will positively impact the sector.

According to Star Health Insurance Chairman and CEO V Jagannathan, currently, the limit of EOM in the general insurance business is 30 per cent and in health insurance is 35 per cent.

The insurance companies are paying insurance intermediaries a commission of 15 per cent of the total premium business they are bringing in. The new regulation has removed the cap. However, the overall limit of EOM will remain.

With the new regulations, an insurance company can pay a higher commission to an agent if the business brought in is good and claim-free, Jagannathan said.

“The liberty to give commission to an agent is left to the company,” he said.

Shriram General insurance’s MD and CEO Anil Kumar Aggarwal said the new norms will facilitate greater product innovation, and development of new product distribution models and lead to more customer-centric operations.

“It will also increase insurance penetration and provide flexibility to insurers in managing their expenses. Overall, it will smoothen adherence to compliance norms,” he said.

Bajaj Allianz General Insurance MD and CEO Tapan Singhel said the proposed regulations will ensure parity across varying business models while rendering greater flexibility in managing expenses for insurers.

What benefit will consumers get?

Post the changes in regulations, insurance agents are likely to be more interested in selling insurance products and explain policy details to consumers beforehand. The claim ratio of these agents will also be better.

When claim outgoes are within the overall manageable limit, an insurance company may not increase the premium, which will be beneficial for consumers, Star Health Insurance’s Jagannathan explained.

The move will also help in increasing insurance penetration as agents will get higher commissions.

When will the regulation come into effect?

IRDAI said the regulation will come into force from April 1, 2023, and will remain in force for a period of three years thereafter.

What do Expenses of Management mean?

Expenses of Management (EOM) include all expenses in the nature of operating expenses of general or health Insurance business and commission to the insurance agents or insurance intermediaries. It also includes commission and expenses on reinsurance inward, which are charged to the revenue account.

Who are insurance intermediaries?

Insurance intermediaries include corporate agents, insurance brokers, web aggregators, insurance marketing firms and a common public service centre – SPV.