The Insurance Regulatory and Development Authority’s consultation paper on distribution reforms is spot-on in addressing rampant mis-selling. The sweeping overhaul proposed includes significant commission caps for distributors and agents, apart from tighter expense management limits for insurers, which the industry believes will dampen sentiment and slow down market penetration. Broadly, the objective seems to be protecting consumers by preventing compulsory insurance bundling with loans, and promoting accountability while ensuring lower costs for getting new customers. However, a substantial part of the insurance ecosystem thrives on commissions. Even though lower commissions would reduce costs for insurers, the companies believe it may lower growth, too. The bright side is that these are draft norms and the regulator may refine the framework after consultation with stakeholders.
While IRDAI’s intent of improving accountability is the need of the hour, defining and determining mis-selling could be a challenge. For now, the draft suggests insurers to comply with basics such as documenting the customer’s needs and explaining product details including consequences of non-payment of premiums and policy surrender. Among the most notable features of the draft framework is customer consent, with the IRDAI clearly insisting that a customer signature alone would not absolve the seller of mis-selling. This is important, as insurance products are increasingly being sold as investment or savings products, often with false promises of high returns. Such instances would likely attract regulator scrutiny, with the IRDAI proposing commission claw-backs, besides improving accountability by making the records public.
In 2023, the IRDAI had allowed a flexible commission framework as long as insurers complied with the prescribed expense management limits. The regulator also noted that the average first-year commissions across products were reported as high as 51 percent in life insurance and 60 percent in general insurance. Sensing the customer’s needs today, the IRDAI proposes to cap the first-year commissions at 5-20 percent, restrict renewal and porting payouts to 5-10 percent, and little-to-no commission on mandatory covers like motor insurance. The industry argues this would discourage post-sale servicing including renewal and claims processing, disrupt distribution networks, squeeze lower-ticket products, and shrink consumer choice. When finalising these rules, the regulator must balance distribution efficiency with improved service quality without derailing financial inclusion.
