The insurance statutory and regulatory framework has, historically, strictly restricted the amount of commission or remuneration that can be paid to insurance agents and insurance intermediaries (such as insurance brokers, corporate agents, web aggregators and insurance marketing firms) for the solicitation and procurement of insurance business. Apart from overall commission caps contained in §40A of the Insurance Act 1938, regulations and guidelines applicable to insurance intermediaries such as the IRDAI (Insurance Brokers) Regulations 2013, the IRDAI's Licensing of Corporate Agents Guidelines of 14th July 2005 and the IRDA (Web Aggregators) Regulations 2013 also placed restrictions on the commission/remuneration that could be paid to insurance intermediaries for placing insurance business.
In addition, for life insurance products, the IRDA (Linked Life Insurance Products) Regulations 2013 and the IRDA (Non Linked Insurance Products) Regulations 2013 (collectively, "Products Regulations") placed "product-wise" restrictions on the commission limits payable to insurance agents and insurance intermediaries.
The Insurance Laws (Amendment) Act 2015 (Amendment Act), however, omitted §40A of the Insurance Act 1938 and set the backdrop for commission and remuneration limits to be revised. In the interim, Life Insurers were still restricted to the limits specified in the Products Regulations for products being launched or the limits set out in the IRDAI approved File & Use application for existing products and General Insurers were still restricted to the maximum commission amounts notified by the IRDAI through its circulars.
Following the promulgation of the Amendment Act, there was widespread debate within the insurance industry on whether maximum commissions to intermediaries should continue to be capped or whether a free market approach should be followed. However, the IRDAI appears to have made its approach clear through the exposure draft released on 13th January 2016. The draft IRDAI (Payment of Commission or Remuneration or Reward to insurance agents and insurance intermediaries) Regulations 2016 (Draft Regulations) make it clear that commission and remuneration to insurance agents and insurance intermediaries will continue to be regulated and subject to maximum limits specified by the IRDAI.
The Draft Regulations inter alia provide as follows:
- Insurers are not permitted to pay insurance agents or insurance intermediaries commission or remuneration in excess of the limits specified in the Draft Regulations. Schedules I to V of the Draft Regulations specify separate maximum limits for various types of life insurance, health insurance and general insurance products.
- Insurers are also not permitted to pay insurance agents or insurance intermediaries any rewards in excess of the amounts specified in the Draft Regulations. In this context, the Draft Regulations define "reward" as "amounts paid, whether directly or indirectly, as an incentive by whatever name called by an insurer to the insurance agent or the insurance intermediary towards benefits such as gratuity, term insurance cover, group life insurance cover, group personal accident cover, group health insurance cover, telephone charges, office allowance, sales & promotion gift items and such other items".
- Insurers are required to have a policy for payment of commission, remuneration and rewards to its insurance agents and insurance intermediaries that must be approved by their Board of Directors. The objectives of the Board approved policy include the utilization of insurance agents and insurance intermediaries in such a manner that:
- Insurance penetration and density is increased;
- Is commensurate with the Insurer's business strategy;
- It brings "cost efficiencies" in the conduct of business and simplification of the administration of insurance business.
- The minimum requirements to be included in the Board approved policy include:
- Manner and conditions for payment of commission or remuneration to insurance agents and insurance intermediaries and for payment of renewal commission and hereditary commission to insurance agents/their legal heirs after the termination of the insurance agency.
- Manner and conditions for payment of reward to insurance agents and insurance intermediaries which is "over and above the commission or remuneration" but cannot exceed:
- 20% of the first year commission or remuneration in the case of individual insurance agents;
- 40% of the first year commission or remuneration in the case of insurance intermediaries.
- Manner and conditions regarding the transfer of orphan policies.
- Grounds and manner for the termination, suspension and cancellation of the appointment of insurance agents and insurance intermediaries.
- Any restrictions on the products to be sold by insurance agents or insurance intermediaries.
- The Board approved policy is to be reviewed annually and changes, if any, are to be filed with the IRDAI within 30 days of the change.
- The Draft Regulations supersede the commission limits specified in the Products Regulations for products to be introduced. However, for all existing products, the commission limits specified by the Products Regulations and the limits set out in the IRDAI approved File & Use application for General Insurers shall continue to be the maximum limits for commission.
- The Draft Regulations clarify that where policies are procured "directly" by the Insurer, no commission or remuneration is payable, leaving the question open in terms of whether any commission, remuneration or reward is payable on products designated as "Online" products which are attributed to the Insurer's direct channel, but may be displayed on a broker or web aggregator's website.
- Insurers are required to file a return in the specified format of the commission, remuneration and rewards paid each financial year that must be certified by the CEO, CFO, CCO and the statutory auditors of the Insurer.
The IRDAI had sought comments from stakeholders on the Draft Regulations by 27th January 2016 and appears to be aiming to implement these regulations by 1st April 2016. Press reports indicate that the Draft Regulations have provoked mixed reactions from the insurance industry. While some stakeholders view the proposed payment structure as more liberal compared to the earlier regime, others believe that there is scope for further liberalization and that the opportunity should be seized to clarify certain open issues that the Draft Regulations presently do not address.
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