Introduction

Insurance business in India has historically been subject to several restrictions in terms of the amounts Insurance Companies are permitted to spend on certain activities, including commission/remuneration and rewards to insurance agents and insurance intermediaries as well as other marketing expenditure. In this regard, the Insurance Act read with the regulations emanating from these provisions have historically capped the commission/remuneration and rewards payable to insurance agents and insurance intermediaries for the solicitation and procurement of insurance business as well as the permissible expenses of management of the Insurer ("EOM").

Following a recent series of regulatory reforms focussed on increasing insurance penetration and improving efficiencies in business operations in the insurance sector and after several months of press reports foreshadowing the same, on 23 August 2022 the IRDAI proposed reforms on commission structures, effectively permitting Insurance Companies to self-regulate the amounts payable to insurance agents and insurance intermediaries through the policy approved by their Board of Directors.

However, the IRDAI has recently released further exposure drafts of 23 November 2022 on (i) the IRDAI (Payment of Commission) Regulations 2022 ("Draft Commission Regulations"), (ii) the IRDAI (Expenses of Management of Insurers Transacting Life Insurance Business) Regulations 2022 ("Draft EOM Life Regulations"), and (iii) the IRDAI (Expenses of Management of Insurers Transacting General & health Insurance Business) Regulations 2022 ("Draft EOM Non-Life Regulations") which, inter alia, propose to repeal the previous IRDAI guidance on these matters and appear to be aimed at simplifying the framework for payments of commission by Insurance Companies and calculation of the EOM limits applicable to them.

Proposed Amendments

A brief summary of the proposed key changes are as follows:

  1. The Draft Commission Regulations only refer to the term "commission" for both insurance agents and insurance intermediaries, and propose to do away with the concept of "remuneration" and "rewards" as presently applicable under the extant IRDAI (Payment of commission or remuneration or reward to insurance agents and insurance intermediaries) Regulations 2016.
  2. The Draft Commission Regulations require every Insurer to have in place a Board approved policy for payment of commission. The policy is to be reviewed annually and is required to take into account various considerations such as increasing insurance penetration, nature and tenure of the policy, enhancing the performance of distribution channels, and other matters specified at R4(c) of the Draft Commission Regulations.
  3. The Draft Commission Regulations propose that the total amount of commission paid should not exceed the EOM limits as specified in the respective regulations for Life and Non-Life Insurers. In this regard, the Draft EOM Life Regulations and the Draft EOM Non-Life Regulations (collectively referred as "Draft EOM Regulations") define "Expenses of Management" to include: (i) operating expenses of life insurance business, (ii) commission to insurance agents, and intermediaries/insurance intermediaries, and (iii) commission and expenses on inward reinsurance (which are charged to Revenue Account) and excludes any charges, such as GST.
  4. The Draft EOM Regulations propose EOM limits as follows:
    1. Insurer carrying on life insurance business: The Draft EOM Life Regulations propose that the EOM should not exceed the limits specified at R4 in respect of various segments of business during a financial year1.
    2. Insurers carrying on general insurance business: The Draft EOM Non-Life Regulations propose that the EOM should not be in excess of 30% of the gross written premium in India in a financial year.
    3. Insurers carrying on health insurance business: The Draft EOM Non-Life Regulations propose that the EOM should not be in excess of 35% of the gross written premium in India in a financial year.
  5. TheDraft Commission Regulations are required to be "reviewed once in every three years from date of notification" unless repealed or amended earlier.
  6. The Draft EOM Regulations also allow certain Additional Allowable Expenses which, inter alia, include Insurtech and insurance awareness expenses.
  7. Further, the Draft EOM Regulations also require every Insurer to have a well-documented Board approved EOM policy which is to be reviewed annually, and a Business Plan to be submitted in advance of a financial year.

Concluding Remarks

The changes proposed to be brought in by way of the Draft Commission Regulations and the Draft EOM Regulations are aimed at significantly overhauling the present insurance framework for distribution channels and expenditure by Insurance Companies. As with the previous draft regulations issued for amending the extant commission structure, the Draft Commission Regulations are also proposing that Insurance Companies self-regulate the amounts payable to insurance agents and insurance intermediaries through the policy approved by their Board of Directors.

Press reports indicate that these changes have been particularly welcomed by various stakeholders in the insurance industry, while others indicate that there may be certain apprehensions expressed by some in terms of actual operation. If implemented in the present form, the historical limits on commission payments may finally come to an end which will be a significant change for the insurance industry in the years to come.

Footnote

1. R4 of the Draft EOM Life Regulations.

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