Insurance commissions could have minimum, maximum caps

Insurance agents can soon expect a better incentive structure for selling policies. The Insurance Regulatory and Development Authority of India (Irdai) is working on a structure, which would have maximum and minimum caps for agent commissions. This means, insurers could have their own bands of commission for the agents within the cap and not follow a fixed percentage structure.

Under Section 40A of the Act, no insurance agent would get a commission exceeding seven-and-a-half per cent of the first year's premium, and two per cent of each renewal premium payable on the policy, where the latter grants a deferred annuity in consideration or more than one premium.

The new caps, if implemented, would mean that a customer would have to pay higher premiums so that higher commissions are paid to agents. This is because commissions are paid out of the policy premium given by a policyholder.

Under the traditional product guidelines in force since January 1, 2014, commissions are linked to the tenure of a policy. The higher the duration, the higher is the commission. Irdai has said commission rates for policies with longer tenure would be higher than those for short-term policies. For policies with tenures of at least 12 years, the commissions would be 35 per cent of the premium.

The regulator had earlier spoken about having a more balanced commission structure between the first and second years, the plan is on the back-burner for now. Since first-year commissions constitute a major portion of the premiums and agents get a large chunk of their commissions from these premiums, the focus on renewal premium is not high. There were also talks of having fixed salary structures, but those with large agency base opposed this.