The recent pandemic has shown that insurance is no longer just a tax-saving investment option but more of a necessity to protect one’s financial future and that of their family. With the changing needs of individuals, there has been an array of insurance products that can be opted by individuals based on their specific needs. However, the common thread between all of them is the high premium cost. One of the significant driving costs of this high premium is the commission expense of the agent and their rewards and remuneration to be paid by the insurer. To ease this burden on the insurers and the ultimate consumer,s IRDAI has proposed to levy a cap on the first-year commissions to 20%.
Below are the details of this Exposure Draft and its impact on agents and policyholders alike.
What is the proposed IRDAI commissions cap?
IRDAI (Insurance Regulatory and Development Authority of India) is the governing body for the insurance sector in India and is responsible for critical changes in the industry for the betterment of all stakeholders. The high commission and the issues of promoting inferior insurance products by the agents with the mere goal of earning high commissions have been long troubling the regulatory authority. The numerous complainants from the end customers are a testimony to the same. IRDAI has therefore proposed to bring a revision to the commission structure to the life and general insurance intermediaries.
According to the current scheme of commission structure, the intermediaries are entitled to get approximately 35% of the first year premium as commission. This huge commission not only increases the Expense of Management (EoM) but also burdens the ultimate consumers of insurance products. If the draft proposal of the IRDAI is implemented in its entirety, there will be a significant reduction in the EoM and the ultimate benefit of the same will be passed to the policyholders as intended by IRDAI. The current and proposed commission structure of the insurance industry is tabled below.
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| Category of Commission on regular premium paying life policies | Existing | Proposed |
| First year net premium | 35% of the first year premium | 20% of the first year premium |
| Renewal commission | 7.5% in 2nd year5% in subsequent years | 10% of renewal premium |
| Rewards/ incentives | 20% of first years commission | Incentives in the proposed draft will be paid in three intervals depending till the tenure the policyholders will stay insured in the product 2% of total premium paid by year 5 in year 52% of total premium paid between year 5 to year 10 in the year 102% of total premium paid between year 11 to year 15 in the year 15 |
Furthermore, the commissions for single premium life insurance policies will be capped at 2% and in case of annuity policies, the commission will be capped at 0.5%. The insurers will also be able to offer insurance plans directly to the end consumers similar to the direct plan offered by the mutual funds. The payment of commission and/or incentives will be in the form of a written policy made by the insurers and to be approved by their Board.
The Board will then have to review the same on an annual basis depending on the performance of the intermediaries and their efforts to penetrate the market, working in the interest of the policyholders and their overall efforts to bring down the cost of operations. The proposed commission structure aims at simplifying the existing system in the industry and streamlining it for the ultimate benefit of all the players.
Why is the cap on commissions proposed to be imposed?
As mentioned above, the industry as a whole had been facing many complaints of insurance agents pushing unsuitable life insurance policies to the end customers in the horde of earning higher commissions. These practices were not only eating into the potential returns of the policyholders but were also resulting in higher Expenses of Management (EoM) for the insurers. These policyholders would also surrender their policies early resulting in higher surrender charges for them in a bid to generate more first-year commissions which were as high as 35% of the net premiums.
IRDAI has further proposed that insurers who can contain their expenses up to 70% of the permissible limit will be allowed to restructure commission rates across different insurance products based on their internal guidelines. This flexibility will allow the insurers to streamline the agent payments and also incentivize them based on the persistency ratio which tracks the renewal premium paid by the policyholders. This move will further help in getting the policyholders insured for longer tenures and the commissions to be spread out for such tenure rather than being concentrated early on.
What will be the impact on policyholders and small agents?
This proposed draft is viewed to be long overdue by industry experts and is said to bring better efficiency to the industry as a whole. It is believed that by bringing down the first-year commissions, the insurers will be able to better structure the commissions and incentivize the intermediaries to promote long-term plans. This proposal will result in a steep decline in the health and life insurance premiums over time which will benefit the ultimate policyholders. However, another view of the industry experts also says that lower first-year premiums will drive out the small agents from the insurance market due to a lack of better incentives to sell life and health insurance products. This move is viewed to be beneficial for the insurers with deep pockets and better association with bankers while smaller insurers with limited resources may not get a better end of the deal.
Conclusion
The revision of the first-year commission caps is a step in the right direction for the industry as a whole and will promote higher efficiency and transparency. Policyholders may not get the immediate benefit of a reduction in the premiums but the same is seen to be the ultimate goal of this proposal. The insurance industry may eventually see a rise in the popularity of endowment products which will benefit the industry too as policyholders will stay insured for longer tenure which means more renewal premiums for the industry.
FAQs
The current cap on first-year commissions is up to 35% of the net premiums
The agents’ commissions are directly linked to the policy premiums
The maximum commission payable to the insurance agent for a fire retail insurance policy is restricted to 15% of the net premiums.
Yes. Insurers who are able to restrict their EoM (Expenses of Management) under 70% of their permissible limit, can set their individual commission limits across different insurance products. However, other insurers who do not meet this criterion will have to restrict their commission to 20% as proposed by the Exposure draft or IRDAI.
No. The exposure draft proposal of IRDAI is not yet implemented. The regulator has asked all the stakeholders to provide suggestions and comments on this matter.
