The Cap on commission payments to agents and brokers has been removed by the Insurance Regulatory and Development Authority of India (IRDAI).
Though there can still be an overall cap on the expenses of the management of insurers, the sub limit on commissions have been removed. Expenses of management includes all operating expenses of an insurance company.
Joint Chairman & MD of Bajaj Capital Insurance Broking said that “The regulatory change announced by IRDAI to remove individual commission payment limits is a major and long-awaited reform in the insurance sector. This shift is anticipated to benefit insurers in a variety of ways, including increased product innovation, the development of new distribution models, and a more customer-centric approach to operations”.
Increased product innovation & Flexibility to Manage Expenses
MD and CEO of Max Life Insurance, Prashant Tripathy said that the removal of the cap on agent commissions will enable insurers to allocate their resources more effectively.
He said that “This policy change will encourage insurers to focus on developing new and innovative products”. This could potentially proliferation of sales of more insurance policies.
The Chief Distribution Officer, Vishnu Kumar said that new products can be introduced for all sections of the society, thus penetrating new and previously untapped markets. He said that “The elimination of the commission payment limit is expected to increase competition among insurers, as they will be able to offer more appealing policies and better pricing to customers”.
On the other hand, this move shall also give more flexibility to insurance companies to determine what amount of commission they wish to pay to the insurance agents. This will also increase sales and business.
Joydeep Roy, partner, PWC, India financial services advisory leader, “Insurers can now decide what commissions they pay for what products and to which distributor. Especially in micro-insurance, the premiums are low, so a premium percentage cap hurts distributors.”.
Agrees Bahroze Kamdin, partner, Deloitte India, “So if it is a normal product, insurance companies may pay a lower commission, if it is a new product they may pay higher commissions”.
New Distribution Models
This cap removal would mean the development of new distribution models which could in turn help insurers reach a wider range of customers which would eventually increase insurance penetration in India, particularly in remote or underserved areas.
Till date, it was under the regulated commission structures that the insurance companies were operating which was challenging as it was difficult to incentivise agents based on their performance. “However, with the recent development by IRDAI, insurance companies now have the freedom to evolve their compensation philosophy. This implies higher pay for higher performance and allows companies to recognise and reward agents who demonstrate higher persistence, therefore retention rates,” says Kumar.
Roy believes that it will also help insurance companies to set goals for distribution. Not only will sales matter, but distributors may be incentivised (or penalised) on other parameters like quality of business, better quality of customers, better data collection, and so on, leading to healthier business.
