Notifying the payment of commission regulations for the insurance industry, coming into effect from April 1, insurance regulator Irdai has replaced earlier caps on commission payments in different lines of business with an overall cap on expenses of management at the company level. With this, insurers will have the flexibility to pay commissions to agents as per their board-approved policies.
The Irdai, in a gazette notification dated March 26, said, “Every insurer shall have a written policy for payment of commission, which shall be approved by the board of the insurer.”
It added that the objective of removing the individual ceiling of commission to be paid by insurers for sale of their products is “to enable and provide flexibility to insurers to manage their expenses within the overall limits based on their gross written premium to optimally utilise their resources for enhancing benefits to policyholders.”
The total amount of commission payable under life insurance products, including health insurance products, offered by life insurers should not exceed the expense of management (EoM) limits specified under Irdai’s regulations, as amended from time to time.
For general insurance companies, the limit, notified on the expenses of management regulations, has been set at 30% of gross written premium in a financial year, while for standalone health insurers, the cap is set at 35% of annual gross written premium.
Notably, EoM of an insurance company includes its operating expenses, commission to insurance agents and intermediaries, and commission and expenses on reinsurance inward, which are charged to the revenue account.
Insurance companies have welcomed the regulator’s move to remove cap on agent commissions.
“We firmly believe that the shift from product-level commissions to a company-wide limit of expenses will ensure parity across varying business models while rendering greater flexibility in managing expenses for insurers,” said Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance.
Singhel, who is also the chairman of the General Insurance Council, said with the majority of the insurers being above the prescribed norms of expenses and the industry reeling with a combined ratio of more than 118%, these EoM limits will help bring cost discipline and take the industry in the right direction of prudency and profitability.
Shriram General Insurance MD and CEO Anil Kumar Aggarwal said the regulatory change was an “eagerly awaited” and path-breaking reform. 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.”
Indranath Bishnu, partner, Cyril Amarchand Mangaldas, said: “It is clear that as long as an insurer maintains financial hygiene, it is free to determine the extent of commission to be paid to its intermediaries. Moving to such a liberalised regime will help intermediaries and insurers enter into more viable arrangements and increase penetration,” Bishnu pointed out.