New Delhi, Sep 25 (IANS) The Insurance Regulatory and Development Authority of India’s (IRDAI) consultation paper introduces a structural reset for the Indian insurance ecosystem by shifting towards an effort-aligned payout framework and capping product-level commissions, according to experts.
The insurance regulator has proposed major reforms in the insurance distribution framework which include a simpler three-tier architecture aimed at lowering costs for policyholders, increasing transparency and strengthening safeguards against widespread mis-selling.
According to experts, the intent will certainly help the customers, but this will also cause an immediate margin squeeze for distributors like, bancassurance partners and NBFCs, etc.
“Ultimately, the proposal aims to drive digital adoption, improve policy persistency and create a more sustainable, consumer-first marketplace. As the saying goes, ‘necessity is the mother of innovation’, and these changes will compel companies to be innovative,” said Debashish Banerjee, Partner, Deloitte India.
IRDAI’s consultation paper on ‘Recalibrating the Economics of Insurance Distribution’ proposes capping remuneration for new-vehicle motor insurance at nil for third-party premium and 5 per cent for own-damage and related covers.
It would also bring “technology, awareness and related spends” within the commission ceiling, while replacing the existing Motor Insurance Service Provider (MISP) framework with a broader Insurance Distribution Entity (IDE) regime.
“The changes would directly affect automobile dealers, OEM-linked brokers, insurers and other motor insurance distributors quite drastically. By reducing upfront earnings from new-vehicle policies and tightening dealer-linked arrangements, the proposals could further compress distribution margins,” said Shailaja Lall, Partner at Shardul Amarchand Mangaldas & Co.
The proposals seek to separate insurance sales from other dealer relationships. Dealers would not be permitted to deny cashless repair merely because a customer purchased insurance elsewhere.
At the same time, IRDAI proposes giving customers greater access to alternative digital channels such as Bima Sugam, with dealers required to prominently inform customers about this option at the point of vehicle sale.
“The reforms could, therefore, change the traditional dealer-led model in which insurance sales, vehicle financing and after-sales servicing are closely linked. Revenue pressures may encourage distributors to place greater emphasis on renewals, servicing, technology and other permissible value-added services,” Lall noted.
The final impact, however, will depend on the provisions ultimately adopted by IRDAI and the transition framework accompanying them, said experts.
The consultation paper proposes capping general insurance commissions across the board, setting health insurance first-time commissions at 15 per cent to 20 per cent while restricting renewal and porting payouts to just 5 per cent to 10 per cent.
The draft paper limits first-year commissions for distribution entities to between 5 per cent and 20 per cent depending on tenure, down from much higher effective payouts that reached up to 60 per cent when accounting for promotional spends and rewards.
—IANS
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