The savings accruing to insurers after the regulator releases the final guidelines on expense management will offer them an opportunity to rework the pricing of policies. The benefits to policyholders will depend on how the insurers use the savings —grow their margins or pass on higher payouts to policyholders.
In the life insurance category, lower distribution costs will allow a larger part of the premium to go into the investment basket, which can benefit policyholders through higher returns and maturity benefits. While premiums for existing policyholders in case of multi-year linked and non-linked plans may not change, new policies may see a reduction in prices. The premium for non-life policies may fall.
Protecting policyholders
The Insurance Regulatory and Development Authority of India (Irdai) has proposed to halve the commission for pure term insurance from an average 51% of the first year premium to 25-30%. However, to improve persistency, it has proposed to double the payout on renewals from an average 4% at present to 7.5-10%. In health insurance, it will drop from 30% to 15-20% in case of a new policy, and 5-10% renewals. For motor insurance, it is proposed to drop to 5-10% from 24% at present.
Irdai has proposed clawback — reclaiming the commission paid to distributors or agents — in case of mis-selling. It has even made individual sales staff accountable by tagging their identity to policies sold and placing information on mis-selling in the public domain. “Clawback should extend to early lapse, and first-year commission should be spread rather than paid up-front. Distribution will change when distributors are paid for selling well, not merely for selling,” Aravind Venugopal, partner, Khaitan & Co.
The regulator aims to tackle compulsory bundling, dark patterns and mis-selling in three ways: prohibit the practices outright, remove the incentives that drive them, and make distributors and insurers accountable for how a policy is sold.
Lenders cannot make a loan conditional on the purchase of insurance as is usually done with home loan. A lender that wants to protect its loan portfolio can take a group policy and pay the premium itself. “Group insurance is better but lenders insist on individual credit-linked products because of higher commission,” says Shilpa Arora, co-founder, Insurance Samadhan.
The impact of lower distribution costs may impact low-ticket policies such as for two-wheelers. “With caps, brokers will not be able to manage claim support which could lead to poor customer experience,” says Indraneel Chatterjee, chief operating officer, InsuranceDekho.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
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