Insurance Amendment Bill: High-commission intermediaries may see payout cut

The Insurance Amendment Bill empowers IRDAI to limit high commissions, reclaim unlawful gains, and strengthen oversight of intermediaries while opening new investment avenues for insurers

Insurance intermediaries who receive disproportionately high commissions are likely to see a decline in their payouts, post the new Insurance Amendment Bill, which gives the Insurance Regulatory and Development Authority of India (Irdai) power to disgorge unlawful gains made by insurers and intermediaries as well as the right to limit commissions paid to the intermediaries. However, use of the provision will depend on how regulations are formed around the same, industry experts said.

 

Intermediaries include bancassurance partners, OEM-linked partnerships, or similar high-volume channels.

 

Higher commissions sometimes compromise the welfare of the policyholder and companies might cut corners around claims. If the commissions run overboard, the Bill gives the regulator power to rein in the rates. However, it has to be seen how the regulations are formed around the same, industry sources said.

 

Experts also pointed out that there are certain distribution arrangements that are driven by disproportionately high payouts, even when the claims performance and persistency indicators do not justify such structures. As the regulator is given additional powers to take actions against violations, entities in violation of the norms — both insurers and intermediaries — could come under greater regulatory scrutiny.

 

“Commission on motor products are expected to go down”, said Anand Shrikhande, co-founder and CEO, Quickinsure.

 

For insurers, those mismanaging policyholder claims might also be under greater scrutiny. Also, entities that are found violating Irdai’s directions are subjected to a penalty of Rs 10 crore, which has been increased from the existing Rs 1 crore.

 

Narendra Bharindwal, president, IBAI, said: “Similar to Sebi, Irdai has now been empowered with a stronger supervisory framework to address instances where market practices may not be aligned with long-term policyholder interests. The intent of this provision is not punitive, but corrective. It is meant to act as a deterrent and will likely be exercised only in exceptional circumstances, where there is a clear mismatch between distribution incentives and policyholder outcomes.”

 

According to Balachander Sekhar, co-founder and CEO, RenewBuy, for too long, penalties could be written off as a cost of business; disgorgement fundamentally alters this calculus by ensuring that the fruits of illicit activities — whether through mis-selling or regulatory arbitrage — are not just penalised but actively reclaimed and restituted to the policyholder.

 

At the same time, the Bill has also opened new investment avenues for the insurance sector by omitting Section 27A of the Insurance Act, 1938, which prohibits insurance companies from investing in shares and debentures of unlisted private entities. According to experts, although the provision has been omitted, changes in investment strategies will be subject to new regulations by the regulator.

 

Investment strategies of insurers are driven by their liability profile and if the regulator approves, their asset allocation strategies will depend on the ALM and product mix of the companies. However, if flexibility is given, insurers may increase exposure in equity/AIF followed by REITs and InvITs to boost investment returns. Currently, 50 per cent of life insurance investment is allocated in government securities and the balance 50 per cent is allocated in other alternative investments, with a minimum 15 per cent in housing and infrastructure sector and the balance 35 per cent in approved/other investments which includes equities/AIF/InvITs/REITs/property etc.

 

“Omitting Section 27A may provide flexibility to insurance companies to increase allocation in alternative asset classes. However, the new norms of the Insurance Amendment Bill stipulate that Irdai shall provide the norms through issuing separate regulations which will entail certain limitations, conditions and restrictions for the 50 per cent in alternative asset classes. Hence, the changes in the investment strategies shall be subject to new regulations issued by the Irdai post the Insurance Amendment Bill comes into effect,” Rahul Bhusukute, chief investment officer, Bharti AXA Life Insurance, said.

 

“The Bill omits Section 27A of the Insurance Act, which included a prohibition on investment in private companies by insurers. With the omission of this provision, it is up to the Irdai to prescribe checks and balances safeguarding investments by insurers into private companies and consequently protecting policyholders’ interests,” he added.

 

The Bill has also approved the amalgamation of a non-insurance company into the insurance company but subject to the condition that they primarily undertake insurance business.

 

Further, along with introducing 100 per cent limit in foreign direct investment (FDI), the Bill has also introduced a new class of insurance in its definition of insurance companies and another class among insurance intermediaries — managing general agent (MGA) — which is a popular concept in the developed world for general insurance segment. They are specialised intermediaries who possess the authority to underwrite binding insurance directly on behalf of the insurer. However, the manner of operations of these entities will depend on the regulations that are prescribed by the Irdai.