Irdai’s executive pay reform may not solve core customer issues, say insurers

On Tuesday, Irdai tightened remuneration norms for key managerial personnel (KMPs) at insurance companies, mandating that 50% of variable pay and incentives be linked to customer-centric parameters such as claims servicing, grievance redressal, product performance and financial soundness.

The revised norms for managing directors and chief executives will come into effect from FY27. However, several industry executives said the final framework dilutes the sharper customer-outcome focus envisaged in Irdai’s draft proposal.

Under the final guidelines, the 50% weightage earmarked for performance-linked pay will be spread across six parameters including overall financial soundness, product performance, claims responsiveness, grievance redressal, implementation of Indian Accounting Standards (Ind AS), and removal of “dark patterns” in customer interactions.

Of this, Ind AS implementation and dark-pattern removal will carry a 10% weightage each, effectively leaving only 30% weightage for core operating and customer-service metrics.

In its draft proposal circulated earlier to insurers, Irdai had suggested a 40:30:30 evaluation structure, with 40% weightage linked specifically to customer-related metrics, 30% to shareholder-linked parameters, and 30% to regulatory compliance measures.

“In a way, it’s an easy win for insurers,” said a top executive at a private general insurer. “Giving 10% weightage to Ind AS implementation is like saying companies should hold five board meetings a year. It is procedural and would happen anyway.”

Irdai has already mandated all life, general and standalone health insurers to transition to Ind AS-based financial reporting from April 1, 2026, while allowing a one-year forbearance for insurers facing implementation challenges.

Another senior insurance executive said the regulator should have extended accountability beyond CEOs and MDs to operational and risk-management teams such as chief financial officers and appointed actuaries.

“In many cases, even CEOs may not fully understand the technicalities of finance and solvency frameworks,” the executive said. “When the risk-based capital framework is implemented, appointed actuaries will play a much larger role. So will there be another remuneration overhaul next year?”

The revised framework also links executive pay to a range of business metrics. Life insurers, for instance, have to disclose indicators such as ratio of assets under management to total premium, renewal premium to new business premium, and persistency ratios under the financial soundness parameter. For general and standalone health insurers, the metrics include line-wise incurred claims ratios and expense ratios.

However, executives argue that several of these parameters are influenced by regulatory or external factors beyond the control of company management. A senior executive at a private general insurer said linking CEO compensation to segment-wise claims ratios would do little to improve customer outcomes.

“In motor third-party insurance, rates have not been meaningfully revised for years even as claims costs keep rising. How can a CEO be held responsible if pricing is controlled by the government?” the executive said.

The executive added that a similar issue exists in health insurance, where pricing increases in certain categories like senior citizen policies have been capped at 10% annually by the regulator. “If pricing flexibility is restricted, insurers cannot be solely held accountable for worsening claims ratios,” the person said. “By focusing primarily on CEO and KMP pay, Irdai may have missed the forest for the trees,” the executive added.