Limits on remuneration/rewards to intermediaries has been an area which is highly controversial and keenly debated, following the changes introduced by the Insurance Laws (Amendment) Act, 2015. The statutory caps on remuneration as contained in Sections 40 and 40A of the Insurance Act, 1938 ("Act") were deleted and simultaneously, amendments were introduced in Sections 31B and 40 to provide that no insurer shall pay any amounts (including rewards) to insurance agents and insurance intermediaries for solicitation of business other than as specified in regulations notified by the IRDAI. Section 114A(2)(ic) and 114A(2)(jd) of the Act empowers the IRDAI to specify the limits on remuneration (whether payable by way of commission or otherwise) and the manner and amount of remuneration and rewards payable to insurance agents and intermediaries by way of regulations.
From the new changes introduced in the Act, it can be perceived that there is a notable shift in the statutory framework towards recognition of the importance of incentivising insurance agents and insurance intermediaries over and above commission on particular business generated by payment of rewards.
The common market practice of incentivising agents and other distribution channels had, hitherto, lead to frequent controversy and was a common subject of penalty orders issued by the IRDAI against insurers, corporate agents and intermediaries alike. Basis the statutory mandate, the IRDAI on January 13, 2016, released an exposure draft on payments of remuneration to insurance agents and intermediaries ("Exposure Draft") which notably recognized payment of rewards over and above standard F&U limits and proposed to regulate the same.
However, on March 15th, 2016, the IRDAI notified a circular ("Circular") clarifying that the existing framework on remuneration to insurance agents and insurance intermediaries was to be adhered to till the time the Exposure Draft was finalized and brought into effect. The Circular excludes the Guidelines on Appointment of Insurance Agents, 2015 of March 17, 2015, which requires insurers to provide their approach on "payment of incentive (bonus) commission" over and above the F&U limits and the "schedule of payments of commission and various other benefits to the agents" in the board approved policy on "agency matters" to be filed with the IRDAI.
As several insurers have already complied with the said guidelines for individual agents, there remains some ambiguity on the approach that they need to take towards commission/ reward payments to insurance agents as well as intermediaries going forward. As it stands now, nothing seems to have changed, despite the Insurance Laws (Amendment) Act 2015 having completed one anniversary of being in force.
From a conceptual perspective, the Exposure Draft does seeks to bring about much needed clarity on the subject by clearly recognising the two fold approach of benefits that may come to intermediaries, i.e., (a) standard remuneration on particular business procured; and (b) rewards that insurers may offer to incentivize good performance of intermediaries.
The Indian insurance sector is keenly awaiting the final regulations in this regard and a clarification on the approach to be adopted till the time the final regulations governing the subject matter is issued by the IRDAI.
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