The Insurance Regulatory and Development Authority of India (IRDAI) on Wednesday proposed a new framework to address loopholes in the insurance distribution system, which could make insurance payments gradually cheaper over the next two years.
Buying an insurance policy often involves a third person, such as a broker, bank employee, or agent, other than the original insurance company who convinces the customer to choose the programme.
Since the 2023 IRDAI reforms, payouts to distributors shot up by 259 per cent while the actual premium payments grew by only 34 per cent.
The average commission for these brokers doubled to 17.5 per cent from 8.5 per cent in 2023. In simple terms, brokers received about ₹17, instead of the previous ₹8.5, for every ₹100 that was paid monthly to the insurance company.
This makes both the consumer and the insurance company extremely vulnerable to the middleman’s interests. The consumer might be forced to pick a policy that pays the broker better, and insurers will have to spend more to sell policies.
IRDAI has introduced new rules to reduce these distribution costs. Under the new framework, the maximum amount agents can earn from selling a policy is strictly specified.
In the case of health insurance, agents cannot receive commissions above 15 per cent. For third-party motor vehicle insurance, brokers will not receive any commission as they get direct access to consumers while purchasing the vehicle. Life insurance commission is capped at 25 per cent.
Hypothetically, if health insurance premium costs ₹20,000, the broker will get ₹3,000 instead of the ₹4,000 they used to receive.
Since commissions constitute a large portion of insurance payments, the operational margins for insurers can considerably widen. However, companies are not required to pass these savings onto the customer.
Therefore, unless competition from rival companies drives down pricing as they try to attract customers, insurance premiums will not become cheaper.
The framework also prohibits insurers from bypassing these caps by offering other incentives. Banks are also banned from forcing insurance as a condition to get loans. The rules require aggregator websites to display clear policy pricing, which means they cannot block pricing behind mandatory phone number or email entry fields.
