IRDAI has issued an exposure draft on appointment of agents in which it has proposed that agents would have to disclose their commissions to their prospective clients. However, agents will have to disclose such a structure only if their clients asked them.
IRDAI said, “Agents should disclose the scale of commission in respect of the insurance product offered for sale, if asked for by the prospect.”
Meanwhile, in line with the recommendations of Sumit Bose Committee, the insurance regulator has proposed restriction on passing back commission to policyholders. IRDAI said that agents should not extend any discount or benefit to policyholders other than that offered by the insurers.
Further, IRDAI has said that agents should not force policyholders to terminate their existing policies within three years. This means agents cannot recommend policyholders to invest in another policy before three years. Typically, first year commissions are higher than renewal commissions which leads to churning.
Another key proposal in the draft regulation is imposition of penalty. As proposed in the Insurance Laws (Amendment) Act, 2015 which seeks to give more teeth to the insurance regulator on imposing penalty, the IRDAI has proposed a fine of up to Rs. 1 crore on insurance companies for mis-selling and violation of code of conduct of their agents. “The insurer shall be responsible for all acts and omissions of its agents including violation of code of conduct specified under these regulations, and shall be liable to a penalty which may extend to one crore rupees,” said IRDAI.
Last year, IRDAI has issued guidelines on appointment of insurance agents in which it has allowed insurance companies to directly appoint insurance agents. However, the applicants have to pass the insurance examination to become an insurance agent.
Also, through another draft regulation issued in September, IRDAI has proposed to scrap additional commission paid to insurance agents on achieving certain targets in non-life and health insurance policies. Also, the insurance regulator has proposed to put an end to the practice of paying advance commission to agents (corporate agents).
In order to improve transparency, IRDAI has asked insurers to clarify their criteria for paying incentives and schedule of payment of commission to agents.
Though these proposals may help policyholders make informed decisions, it may transform the insurance intermediation industry as it exists today. Generally, policyholders have no idea where their premium goes and how much cost they are bearing towards commission, management and fund allocation.
