Former members of the IRDAI fear that the regulator’s proposal to grant flexibility to insurers on commissions might result in them passing on related costs to policyholders.
Recently, IRDAI proposed to lift the ceiling on commissions on individual lines of non-life business subject to an overall cap of 20%. There is also an overall expenses cap of 30% for non-life and 70% for life companies. Linking commissions to the overall expenses cap also ensures that only the efficient insurance companies with lower costs will have the headroom to pay more commission. Similarly, in the life sector, there are relaxations on commissions on certain lines.
Analysts tracking insurance companies have broadly welcomed the relaxations. However, former regulators have some concerns.
“Even in a rapidly changing economic world, there are some fundamental principles that remain unchanged. All the expenses that insurers incur are paid out of policyholders’ funds. The restrictions on commission and management expenses in the law were to ensure that insurance companies conduct their basic function of managing the pool of policyholders’ funds at minimal cost,” said IRDAI’s former non-life member K Srinivisan. He added that if some companies recklessly increased commission, it would defeat the purpose. “Ultimately, it is the policyholders who have to pay for the exorbitant costs of insurers, which will result in an abnormal increase in premiums,” he added.
According to IRDAI’s former member (life) Nilesh Sathe, there was a commission ceiling of Rs 10 lakh on group-funded policies like gratuity and annuity or superannuation. Removing the cap may result in higher churn and unhealthy practices for businesses of large companies. “Short-term premium products’ commission rates are enhanced and will apply to new policies. For a 5-year premium-paying term policy, the commission payout will be 25% higher. It will impact the internal rate of return of these policies,” he added.
Sathe pointed out that it is not clear what is the clawback mechanism for companies that promise to meet the statutory expense ratio to avail the flexibility on commission but fail to do so.