In a draft circular, IRDAI has proposed to put a cap on commission structure of life insurance agents by keeping such payouts within the expense ratio. However, the regulator has said that it may allow insurers to payout higher commissions to their distributors by hiking expense ratio based on certain conditions.
IRDAI has said, “No insurer carrying on life insurance business in India, shall spend in any financial year as expenses of management, an amount exceeding – the amount of commission or other remuneration paid to insurance agents and insurance intermediaries in respect of their business transacted in the financial year as may be allowed by the authority from time to time; provided that the authority based upon the representation received from an insurer, may allow higher remuneration to the insurance agents and insurance intermediaries with such conditions as may be deemed fit.”
Earlier, IRDAI had sought feedback from insurance companies through Life Insurance Council (LIC) and General Insurance Council (GIC) to rationalize commission structure of insurance agents. A senior official from IRDAI had earlier told Cafemutual that the insurance regulator has sought to limit the expenses incurred on agents in the form of junkets, loyalty programs etc. within the upfront commission.
He had said, “We have had initial discussion with insurers to rationalize the commission structure through both the insurance councils. The expenses incurred on junkets, loyalty programs and training should be within the distributable commission. For instance, if upfront commission is 20% of premium, insurers can split such payouts like 15% as upfront commission and rest on junkets. The insurance regulator will not allow insurers to charge policyholders for expenses incurred on intermediaries. Insurers can spend on such activities from their shareholders account.”
Currently, insurance companies spend on such activities from their premium amount.
Last year, T.S. Vijayan, Chairman, IRDAI told Cafemutual that first year commission or upfront commission paid to the agents should be within the expense ratio. He said that the discretion to pay first year commission has been left to insurance companies. That means, insurance companies can pay higher commissions to insurance agents; however, it has to be paid from their own accounts and not from policyholders account.