With rising complaints against claim rejections, the insurance regulator has mandated that the variable pay of the top management of private insurers be linked with claim response and grievance handling. Saikat Neogi explains the customer-centric metrics & the challenges ahead.
What has Irdai proposed?
The Insurance regulator and Development Authority of India (Irdai) has directed that the remuneration of managing directors, chief executive officers and other top executives including chief financial officer, appointed actuary, chief investment officer, chief risk officer, chief compliance officer and the company secretary be linked to customer-centric outcomes, including claim responsiveness and grievance redressal.
The regulator has mandated that at least 50% of the variable pay and incentives of these key managerial personnel (KMP) be tied to parameters such as product performance, claim responsiveness, grievance redressal and policy persistence with immediate effect.
Typically, 50% of the total cost-to-company of KMP consists of variable pay or incentives. So, poor returns on life insurance savings products or delays in settling claims and grievances in non-life products could hit their pay packets.
Irdai’s directives comes at a time when customers are increasingly raising grievances related to mis-selling and claims being rejected. Data from Irdai’s annual report shows more than 250,000 insurance grievances were recorded in FY25, a rise of 20% from FY24.
How will the Irdai’s directives work?
The nomination and remuneration committee of the insurer in consultation with the risk management committee will formulate the remuneration policy of key personnel.
The six parameters to be considered for payment of variable pay are overall financial soundness and improvements, product performance and improvements, claim responsiveness and improvements, grievance redressal, implementation of Indian Accounting Standards (Ind AS) and removal of dark patterns in the company’s interaction with the public and ensuring the same for its distributors.
These six parameters will have a total weight of 50%. Of which, the last two parameters will have a weight of 10% each. The weight of the other four will be decided by the board. For the balance weightage of 50% for performance assessment, the board may adopt additional parameters in line with the business plan of the company.
What are the mandated disclosures?
To enhance transparency and accountability, insurers will have to disclose comparable information for the current as well as preceding three years. The disclosure of products’ performance will include features, premium, performance and returns of all products collectively contributing 90% of new or renewal premium.
For general insurers and standalone health insurers, detailed disclosure of claim responsiveness in case of retail health, motor, personal accident, home, etc., policies is mandatory.
Details will include the number and proportions of claims settled in full or in part, rejected, repudiated or closed within 15 days, 30 days, 60 days and beyond from the date of filing of the claims and remaining unsettled at the end of the month being reported. The value proportion of claims settled will have to be reported. While some disclosures are on a quarterly basis, others will be required on a monthly basis.
Challenges in implementation
While the measures are customer-centric, there are some structural challenges that are beyond the control of the management. Linking compensation of key management to segment-wise claims ratios may not improve customer outcomes much.
For example, in case of the mandatory motor third-party insurance, rates have not been meaningfully revised by the regulator for years even as claims costs are rising. Similarly, in health insurance, annual premium hikes for certain categories, such as senior citizen policies, are capped at 10%, while claims from this segment continue to grow sharply due to age-related illnesses.
Some industry participants contend that the proposal could dilute the role of shareholders and promoters in determining compensation structures of KMP. Moreover, as 20 percentage points of the 50% variable pay component would be linked to Ind AS implementation and the elimination of dark patterns, it will only be 30 percentage points tied to operational and customer-service metrics.
How other countries do it
Insurance regulators of many countries have introduced clawback clauses in variable compensation of top insurance executives to prioritise policyholder outcomes and address customer grievances.
In the United Kingdom, the Prudential Regulation Authority rules for the insurance sector ensures that up to 60% of variable pay is deferred for three years in case customer grievances are not addressed within the set timeframe.
Many European insurers have deferral compensation mechanisms in place to deter excessive risk-taking by companies. In cases where massive mis-selling or data breaches are found, the top executives of the insurance company will have to return the variable pay, sometimes with penalties.
In the United Arab Emirates, the Central Bank of UAE has introduced remuneration regulations for both banks and insurance companies, requiring them to put clawback frameworks of top executive compensation in case the bank’s or insurer’s financial health is hit or regulatory violations are discovered.