Limits don’t apply but *CONDITIONS APPLY

The Insurance Regulator (IRDAI) has recently amended the regulation on payment of commission to Insurance Agents and other intermediaries. Previously, maximum limits were imposed on various categories of products. Now, in the new regulation, those limits have been removed. The commission shall not exceed the expenses of management (EOM) limits. In other words, insurers can decide on the commission they want to pay to insurance agents and intermediaries, subject to EOM limit.

To my mind, this is a big statement given by regulator towards principle-based regulations. Various stakeholders of industry have been asking for a free hand in running the business. This regulation is one big step in that direction. In the absence of limits, Insurers can now pay commissions that are appropriate for acquiring business. This should give the desired flexibility in payment of commissions based on the business requirement.

In practice, however, there can be challenges. Those insurers well within the EOM limit can afford to pay more commission than what is paid today. Others who are on the borderline will struggle to compete with them. The biggest worry in the industry is, does this lead to unhealthy competition in payment of commissions?

The next question is, who will be impacted by this additional expenditure? Before answering this question, it is important to understand the relationship between EOM limit and commission. EOM limit does not mean it is the money available to pay commission. The commission allowed for, in pricing, is what is available. This is different from EOM limit. If you pay more than allowed in pricing (less than EOM), the profit margin under the product will come down impacting the company. To address this, if you decide to increase the commission allowance by repricing the product, it will not be good for policyholder as he gets the same benefit for higher price. So, paying higher than current levels will impact some stakeholder or the other.

While the limits are removed, the new regulation is not completely unrestrictive. Conditions apply. EOM limit is one such condition. The regulator is going to review this regulation mandatorily, after 3 years. This is something new and was not there in the earlier version of this regulation. So, regulator is making it clear that the flexibility does not come for free, and will be reviewed if not utilised for what it is intended for.

Also, the regulatory returns on payment of commission shall be reviewed by the audit committee prior to the approval of board.

So, the board, audit committee and the senior management of the company have a responsibility in ensuring that the stakeholders are not adversely impacted. Regulator made his intentions clear on principle-based regulations. It’s now up to the industry to ensure that the spirit of these regulations is not violated.