Indian insurance laws have traditionally restricted distribution of insurance products to insurance agents and insurance intermediaries who have obtained the requisite license/registration from the Insurance Regulatory and Development Authority of India (IRDAI). §40 of the Insurance Act 1938 (as well as various regulations issued by the IRDAI) strictly prohibits unlicensed persons from distributing insurance products and/or receiving any payment from an Insurer for distribution of insurance products.
These prohibitions, while aimed at protecting the interests of policyholders, resulted in issues for Insurers and insurance intermediaries in terms of accessing potential customers for certain lines of business and, particularly, motor insurance products. In this regard:
- §146 of the Motor Vehicles Act 1988 makes it compulsory for third party liability insurance to be obtained for all vehicles before they are plied on the road; and
- The policy wordings for all motor insurance policies are still governed by the terms and conditions issued by the erstwhile Tariff Advisory Committee. Insurers are now permitted to have some add-on covers and endorsements, but, broadly, these products remain fairly standard.
Therefore, unlike several other lines of insurance where penetration remains fairly low, most customers of new automobiles prefer to purchase motor insurance along with the vehicle itself and, often have a fairly limited decision to make in terms of choosing the insurance product they wish to purchase. With this background, over the years, Insurers and insurance intermediaries have attempted accessing these prospects, including by placing their personnel at the premises of automobile dealerships and compensating the automobile dealership for the space used. However, in several instances, the IRDAI has raised questions over these arrangements which have been, largely, focussed on unlicensed persons being involved in the solicitation and procurement of insurance business. This led to a growing need being felt to address the issue of distribution of motor insurance at automobile dealerships' premises.
The first step in terms of reform was in October 2015 when the IRDAI notified the Guidelines on Point of Sales Person (POSPs) to simplify solicitation of insurance products which require very limited underwriting. POSPs are individuals that could be engaged by either Insurers or insurance intermediaries. Minimum qualifications (10th standard passed) were required and POSPs were to be trained and certified by the Insurer/insurance intermediary, engaging such POSP. Motor (comprehensive and third party liability) products were among the products that were permitted to be solicited by POSPs. While this was, indeed, a welcome step aimed to increase insurance penetration in the country, certain logistic issues persisted as Insurers and insurance intermediaries were still required to place POSPs within automobile dealerships which let to these dealerships seeking compensation for usage of space/personnel.
In view of such complexities and surviving market practices, in November 2015, IRDAI formed a seven member committee to "bring clarity and transparency in payouts made to the auto dealers by the insurers for getting motor insurance business."
Ultimately, on 31st August 2017, the IRDAI notified the "Guidelines on Motor Insurance Service Providers" (MISP Guidelines) to identify and regulate the role of the automobile dealers in distributing and servicing motor insurance products.
The key features of the MISP Guidelines are as follows:
- A 'motor insurance service provider' (MISP) is defined as an automobile dealer appointed by the Insurer or an insurance intermediary to distribute and/or service motor insurance policies of automobiles sold through such dealer. An MISP is consequently only permitted to distribute and service motor insurance policies. The term "servicing of insurance business" has been defined to include receiving instructions from customers with respect to amendment, endorsement, modification, renewal, cancellation of motor insurance policies, and guiding and assisting customers on insurance claims.
- The term "automobile dealer" includes authorised dealers or sub-dealers of automobile manufacturers selling new or used automobile vehicles.
- The MISP is required to comply with the Code of Conduct prescribed under the MISP Guidelines while soliciting and servicing insurance policies. In order to ensure compliance, an MISP is required to nominate a "Designated Person". The Designated Person along with all persons soliciting and procuring insurance for the MISP are required to be at least 12th standard passed and trained and certified by the Insurer/insurance intermediary engaging such MISP. However, it is interesting to note that the ultimate liability for the acts and omissions of a MISP lie jointly with the MISP and the Insurer/insurance intermediary engaging such MISP.
- Insurers/insurance intermediaries that seek to enter into an arrangement with an MISP are required to enter into a written agreement with the MISP. Further, the Insurer/insurance intermediary engaging the MISP is required to upload the relevant data of the MISP on the Insurance Information Bureau portal.
- The MISP Guidelines prescribe the maximum Distribution Fees that can be paid to the MISP for soliciting insurance business by the Insurer or insurance intermediary engaging the MISP. Further, apart from the restrictions on the amount of Distribution Fee payable:
- The Insurer's cannot pay any remuneration or reward to an insurance agent or insurance intermediary on any policy which has been solicited by a MISP and in respect of which the MISP is being paid Distribution Fees.
- MISPs and their associate companies have been strictly prohibited from directly or indirectly receiving from Insurers any payment by whatever name called, other than the Distribution Fee permitted under the MISP Guidelines.
- The remuneration paid by an Insurer to an insurance intermediary or an MISP is required to be subject to a monthly audit for compliance with the MISP Guidelines, and the report of the independent auditor is required to be placed before the Audit Committee of the Insurer. Additionally, Insurers/insurance intermediaries are required to put in place systems for the day to day monitoring of all the MISPs engaged by them.
- Any automobile dealers already having an insurance intermediary license/certificate are required to surrender their existing certificate of registration/license and necessarily become MISPs in compliance with the terms of the MISP Guidelines.
The IRDAI's move to recognise the role of automobile dealers through the MISP Guidelines gives legitimacy to existing practices of solicitation and servicing of motor insurance by involving automobile dealers. However, it is interesting to note that as the MISP Guidelines permit both Insurers and insurance intermediaries to engage MISPs, in the event that Insurers chose to engage MISPs directly, the involvement of other insurance intermediaries in soliciting and procuring motor insurance products may, effectively, be minimised. Further, with the introduction of the POSP Guidelines and the MISP Guidelines and the legitimisation of distribution of insurance through automobile dealers, the other existing structures and practices in relation to automobile dealers will have to be dismantled.
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