Mumbai:Observing that commissions and distribution costs of insurance companies have risen faster than premiums, insurance regulator IRDAI has proposed limits on agent commission, restrictions on bundling insurance with home and motor loans, and switching to a premium-linked expenditure model for insurance companies. The regulator has sought public and industry comments on the draft norms by October 25.
In a two-part consultation paper issued late Wednesday, IRDAI identified mis-selling as a major contributor to premature surrender of life insurance policies and proposed stronger safeguards, including a commission clawback mechanism if a policy was mis-sold. It also proposes standardised disclosure of product, pricing and quality information without requiring customers to first provide personal details.
Among other proposals aimed at curbing mis-selling the IRDAI proposed documenting customer needs and suitability, linking the identity of the individual distributor to the policy sold and making information on mis-selling incidents available in the public domain.
The regulator has also proposed a ban on volume-linked or reward-linked incentives for bank and NBFC employees selling insurance products.
The proposed norms prohibit banks and NBFCs from compulsorily bundling insurance with loans and other financial products. The paper defines compulsory bundling as agreeing to provide a loan only if the borrower necessarily buys an insurance product. This could include life, property, motor or health insurance linked to a loan.However, the regulator has proposed allowing packages where there is a specific and demonstrable gain to the customer. This could include a lower interest rate if the borrower provides additional security through term life or property insurance.
The consultation paper also flagged foreign and domestic trips, luxury gifts, milestone bonuses and contest rewards as examples of sales incentives that can create a conflict between customer suitability and a distributor’s sales target.
The proposals seek to separate motor insurance sales from other dealer relationships. Dealers would not be permitted to deny cashless repairs merely because a customer purchased insurance elsewhere.
The regulator has proposed that commission on mandatory third-party insurance for new vehicles should be nil for distribution entities and 2.5 per cent for agents. Commissions on own-damage and other covers would be capped at between 5 per cent and 15 per cent, depending on the distribution channel and age of the vehicle.
Another major proposal is a phased reduction in insurers’ expense of management (EoM) limits, which cover expenses associated with running the insurance business, including distribution-related costs.
For life insurers, IRDAI has proposed shifting to a company-level EoM limit linked to gross direct premium income (GDPI). The limit would be reduced to 15 per cent within two years and 12.5 per cent within five years. For general insurers, the regulator has proposed changing the basis from gross written premium (GWP) to domestic GDPI. The EoM limit would be progressively reduced from the existing 30 per cent of GWP to 20 per cent of GDPI over five years
Commenting on proposals, Shailaja Lall, Partner at Shardul Amarchand Mangaldas & Co, said, “the reforms could change the traditional dealer-led model in which insurance sales, vehicle financing and after-sales servicing are closely linked. Revenue pressures may encourage distributors to place greater emphasis on renewals, servicing, technology and other permissible value-added services.”
The proposed norms could result in an immediate reduction in revenue for distributors such as banks, NBFCs and agents.
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