IRDAI Mandates Companies To Disclose Discounts On Direct Plans In Insurance: Will It Lower Your Insurance Premium?

• IRDAI mandates insurance companies to disclose the discount they offer in the policies approved by their board.
• It will promote transparency in the industry.
• The new rules are effective from April 1, 2023.
• The insurance regulatory authority hasn't mandated companies to offer their customers direct plans.

Direct plans in the insurance sector were not available previously. To help customers get insurance plans directly from the company, the Insurance Regulatory Development Authority (IRDAI) has brought a new rule. It came into effect on April 1, 2023.

What's The New Rule of IRDAI?

According to this new rule, every insurance company must have a well-documented policy to disclose discounts on any direct purchase. As the insurer doesn't have to pay an agent commission, it may pass on the benefit by lowering the insurance premium of consumers.

How Can The New Rule Help Insurance Consumers?

To understand how a direct plan can help you get a lower income, you should first learn about the costs of different insurance policies.

An insurance company levies two kinds of charges:

• Administrative charges
• Mortality charges

If you've chosen a ULIP plan (unit-linked insurance plan), your insurance company will levy an additional charge called a fund management charge. This charge is levied because these plans are market linked.

Insurance companies strongly believe policies must be sold, as people don't buy insurance independently. That's why these companies reward their agents by paying their commissions handsomely. These commissions form a large part of the administrative charges of insurance companies.

Also Read Insurance Agent Vs. Insurance Broker: Difference

With time, awareness about insurance has increased significantly in India. The need to sell insurance policies solely through agents has decreased. Lots of people are already aware of the benefits of insurance policies. That's why more and more people are approaching insurance companies directly to buy insurance policies.

Earlier, there was no mechanism for insurance companies to accept insurance proposals without agent codes. That's why customers who wanted to buy policies directly from insurance companies were forced to purchase policies through insurance agents.

Once the insurance companies felt this increasing need of customers, they started addressing the issue by providing customers with direct plans for term insurance and other products. IRDAI figured out that the insurance companies are not passing on the full benefit of saving agent commissions to the customers (either in the form of increased returns or reduced premiums).

To address this issue and pressure insurance companies to pass on the benefits to the customers, the insurance regulatory body introduced the new rule that has come into effect since April 1, 2023.

Has IRDAI Mandated Insurance Companies To Launch Direct Plans In Insurance?

The insurance regulatory authority hasn't mandated companies to offer their customers direct plans. Instead, IRDAI has only mandated more transparency on the declarations of insurance companies.

Also Read: IRDAI's Customer-Centric Reforms in 2023

Direct Vs. Regular Plans

Let's explain this concept by considering the case of mutual funds in India.

Mutual Funds

The mutual fund house provides customers with the following:

• Regular plans
• Direct plans

While the regular MF plans include distributor commission, regular plans don't have this commission cost embedded in them. If you invest in a mutual plan through a direct plan, you can buy an MF plan directly from their website or through a branch of the fund house. Doing this means you don't have to pay the distributor's commission. The distributor's commission is the only difference between a regular and a direct plan. Hence, your return on investment is higher in the case of a direct plan than in a regular plan.

Insurance

IRDAI hasn't mandated the insurance companies to offer direct plans with lower expense ratios than the regular ones. However, on their websites, Aegon Life Insurance and Acko General Insurance provide direct plans insurance with lower premiums.

Final Words

Unlike the mutual fund industry, the insurance sector hasn't taken the giant leap forward by offering direct plans in insurance. The latest notifications of IRDAI are just small steps toward that end.

The new rules of the Insurance Regulatory and Development Authority of India have mandated that insurers mention the discount they offer in the policies approved by their board. However, the regulatory authority has only stressed transparency. They are yet to make it mandatory for insurance companies to offer their customers direct insurance policies besides regular ones.

The new rule will make insurers more transparent about their cost structure and the discount provided to their customers. It will, in turn, put passive pressure on insurers to pass on the full benefit of cost-saving in direct plans over regular plans.