- Date : 06/04/2023
- Read: 3 mins
A look at the new commission payout notification by IRDAI
The Insurance Regulatory and Development Authority of India (IRDAI) announced a new commission payout notification, which has become effective from 1 April 2023. As per this notification, insurance companies are not required to comply with any specific limit on the commission amount that they pay to their agents, intermediaries and distributor banks. However, the same has to stay within the limits defined for Expense of Management (EoM) by the apex insurance body.
Also Read: How to spot insurance frauds and protect yourself from them
Background of the IRDAI Notification
As per the notification, there will be no reduction in the commission payouts, but there is an overall cap on its maximum amount. Insurance companies will continue to pay commissions as per the policy approved by their board.
In August 2022, IRDAI suggested in a draft paper that the insurance commission may be reduced from 35% to 20%. The draft paper, titled “Payment of commission or remuneration or reward to insurance agents and insurance intermediaries”, brought rays of hope for the policyholders as the 20% cap was proposed to be applied to the first-year commission. IRDAI also advocated this reduction to discourage the practice of policy surrenders, particularly in the initial years.
However, in the new proposal released on 24 November 2023, IRDAI took a U-turn and decided to allow commission payment within the limits of the EoM ceilings. The recent notification is in line with the November 2022 proposals.
Also Read: How cost-effective are your insurance policies
Effects of the Notification
With this notification, the regulator has tried to put all the insurance costs under one bucket, namely the EoM. The insurance companies will have the liberty to decide their cost priorities while adhering to the umbrella EoM limit. As per the notification released on 28 March 2023, EoM in general insurance companies cannot exceed 30%, while the limit is 35% in standalone health insurance companies. Besides, the segment-wise caps are being done away with in favour of the overall EoM cap.
The move will also curtail the possibilities of unfair escalations in commission expenses by insurance companies. Notably, it will no longer be possible for insurance companies to hand out rewards and incentives beyond the regulatory limits. EoM includes costs like technology, administration, employee costs, commission, etc.
High commission rates have always escalated the cost of insurance for the common policyholder. With products like mutual funds where the expense ratio has reduced over the years, the leash on commission payout was much needed.
Also Read: IRDAI puts customers first. Lays the groundwork for customer-centric reforms
At first sight, a policyholder may conclude that the notification doesn’t offer much in terms of reducing the existing commission payments. This is because insurance companies can and probably will continue to pay high commissions. This will limit the policyholder returns and also continue to motivate agents to sell unsuitable products to gullible policy buyers. However, insurance companies must now walk the tightrope of balancing between the commission and other EoM expenses. The importance of non-commission expenses cannot be ruled out, given their importance in the growth of the company.
Source:
The Insurance Regulatory and Development Authority of India (IRDAI) announced a new commission payout notification, which has become effective from 1 April 2023. As per this notification, insurance companies are not required to comply with any specific limit on the commission amount that they pay to their agents, intermediaries and distributor banks. However, the same has to stay within the limits defined for Expense of Management (EoM) by the apex insurance body.
Also Read: How to spot insurance frauds and protect yourself from them
Background of the IRDAI Notification
As per the notification, there will be no reduction in the commission payouts, but there is an overall cap on its maximum amount. Insurance companies will continue to pay commissions as per the policy approved by their board.
In August 2022, IRDAI suggested in a draft paper that the insurance commission may be reduced from 35% to 20%. The draft paper, titled “Payment of commission or remuneration or reward to insurance agents and insurance intermediaries”, brought rays of hope for the policyholders as the 20% cap was proposed to be applied to the first-year commission. IRDAI also advocated this reduction to discourage the practice of policy surrenders, particularly in the initial years.
However, in the new proposal released on 24 November 2023, IRDAI took a U-turn and decided to allow commission payment within the limits of the EoM ceilings. The recent notification is in line with the November 2022 proposals.
Also Read: How cost-effective are your insurance policies
Effects of the Notification
With this notification, the regulator has tried to put all the insurance costs under one bucket, namely the EoM. The insurance companies will have the liberty to decide their cost priorities while adhering to the umbrella EoM limit. As per the notification released on 28 March 2023, EoM in general insurance companies cannot exceed 30%, while the limit is 35% in standalone health insurance companies. Besides, the segment-wise caps are being done away with in favour of the overall EoM cap.
The move will also curtail the possibilities of unfair escalations in commission expenses by insurance companies. Notably, it will no longer be possible for insurance companies to hand out rewards and incentives beyond the regulatory limits. EoM includes costs like technology, administration, employee costs, commission, etc.
High commission rates have always escalated the cost of insurance for the common policyholder. With products like mutual funds where the expense ratio has reduced over the years, the leash on commission payout was much needed.
Also Read: IRDAI puts customers first. Lays the groundwork for customer-centric reforms
At first sight, a policyholder may conclude that the notification doesn’t offer much in terms of reducing the existing commission payments. This is because insurance companies can and probably will continue to pay high commissions. This will limit the policyholder returns and also continue to motivate agents to sell unsuitable products to gullible policy buyers. However, insurance companies must now walk the tightrope of balancing between the commission and other EoM expenses. The importance of non-commission expenses cannot be ruled out, given their importance in the growth of the company.
Source:
