IRDAI’s new rules on commission payments give insurers more flexibility to manage their expenses
3 min read 28 Mar 2023, 07:34 PM ISTThe insurance regulator has replaced the earlier individual cap on commission payments on insurance products with an overall cap on expenses of management of insurers
PremiumThe Insurance Regulatory and Development Authority of India (IRDAI) has approved new rules on the payment of commissions to insurance agents or insurance intermediaries by insurers. Under the IRDAI (Payment of Commission) Regulations, 2023, notified on 26 March 2023, the insurance regulator has replaced the earlier individual cap on commission payments on insurance products with an overall cap on expenses of management of insurers. The rule is applicable for life and non-life insurers (general and standalone health insurers). Hence, the move can provide more flexibility to insurers in managing their expenses. These regulations will come into force from 1 April 2023 and will be reviewed once every three years.
The move will benefit policyholders: The IRDAI announced some important regulatory changes, which is good for policy buyers and the insurance industry, i.e., the revised Expenses of Management (EOM) and commission limits for the industry. Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance, “We firmly believe that the shift from product level commissions to a company-wide limit of expenses, as proposed through the proposed regulations, will ensure parity across varying business models while rendering greater flexibility in managing expenses for insurers. Moreover, with the majority of the insurers above the prescribed norms of expenses and with the industry reeling with a combined ratio of more than 118%, these EOM limits will help in bringing cost discipline and take the industry in the right direction of prudency and profitability. This should hence translate into better pricing and products for customers in the medium to long term."
Anil Kumar Aggarwal, MD and CEO at Shriram General Insurance, echoed the industry’s sentiments, “The removal of the cap on commission payments will positively impact the insurance sector. It will facilitate greater product innovation, 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."
The move will benefit the Distribution-led business model: The revised regulations will provide an extra expense allowance for Insurtech expenses, spending on insurance awareness, and rural and social schemes of the government, etc. Abhishek Bondia, principal officer and managing director of SecureNow.in, said, “This is a positive move for the industry and boosts insurance penetration. Distribution-led business models would likely attract more investments. Insurers would be more able to incentivise reach for priority segments such as individual protection plans, commercial insurance for small businesses, and tier-2 cities.
According to the IRDAI notification, these regulations‘ objectives are to enhance the regulation’s responsiveness to market innovation. To facilitate the insurers in developing new business models, products, strategies, internal processes and enable easy compliance with the Regulations while fulfilling the regulatory objectives. And to provide the insurers with the flexibility to manage their expenses based on their growth aspirations and the ever-changing insurance needs with an objective to improve insurance penetration.
However, clarity around the total allowable expenses of management, including commission and operating costs for the insurer, is still awaited. Mayank Gupta - Co-Founder and COO of Zopper, said, “The authorities are clearly moving the system towards a more transparent environment and encouraging flexibility. With only top limits being defined, the market will move towards more vigorous negotiations and encourage the best deals to surface. The customers will surely have more robust, well-designed, cost-effective product offerings by stable organisations they can trust in the long run."
N. S. Kannan, managing director & CEO, ICICI Prudential Life Insurance, said, "The increased flexibility in commission limits will allow insurers to react to market forces in a quicker manner, thereby supporting the IRDAI’s vision of improving penetration of insurance in the country. The expenses of management have increased allowability in the later years of the policy while limiting expenses in the initial year. This will persuade insurers to work on improving long-term persistency, which in turn will improve the customer proposition as well as the Company’s profitability."
