IRDAI’s New Commission Regime to Encourage Innovation and Insurance Growth

The Insurance Regulatory and Development Authority of India (IRDAI) and India’s insurance industry have consistently aimed at increasing insurance penetration and insurance density in India. In its 2021-2022 Annual Report, the IRDAI recorded that India’s insurance penetration remained at 4.2 per cent and insurance density increased to $91 in 2020-2021, whereas global insurance penetration and density were higher at seven per cent and $874, respectively. Both these metrics are key to the growth of the insurance industry in India, and the economic well-being of our vast population. While there are multiple methods that have been employed for insurance penetration, including awareness programmes, perhaps the three key elements have been:

(a) driving insurance sales through internal marketing teams of insurance companies;

(b) deepening insurance penetration by external distribution channels such as insurance agents and insurance intermediaries such as insurance brokers, bancassurance and corporate agency channels, and web aggregators; and

(c) creating innovative insurance products which address unique risks or address existing risks in a unique manner. 

The commercial element of using external distribution channels has been historically regulated in a relatively strict and prescriptive manner as the IRDAI has tried to reign in excessive spending by insurers. Accordingly, the IRDAI has previously issued show cause notices, and after providing an opportunity to be heard, final orders against insurers and intermediaries for providing and receiving prohibitive commission and remuneration, as well as rewards (both cash and non-cash incentives). To regulate these, the IRDAI had introduced a detailed set of commission caps linked to the type of insurance product in the IRDAI (Payment of commission, remuneration and rewards to insurance agents and insurance intermediaries) Regulations, 2016. The insurance industry has been constrained to these limits which have not only capped intermediary remuneration, but also kept a lid on a lot of product innovation and deepening of the insurance market that could have been led by insurance intermediaries. It appears that, with intent of uncorking creativity in insurance business models and product creation, as well as encouraging the external distribution channel participants to increase insurance penetration, the IRDAI has recently published new principles-based regulations (New Regulations) to govern the payment of commission in the insurance industry.

The New Regulations will take effect from 1 April 2023, and, perhaps to encourage regulatory change to respond to market dynamics, they will be reviewed every three years, unless an earlier review, repeal or amendment is warranted. The New Regulations target a few laudable objectives such as enhancing responsiveness to market innovations; facilitating insurers developing new business models, products, strategies and internal processes; and providing flexibility to insurance companies to manage their expenses based on their own growth aspirations.

One significant change is that commissions will now be linked to an insurer’s overall expenses (as set out under the new regulations on management of expenses) rather than remain as product-linked commissions. The latter was quite complicated and prescribed different commission limits depending on type of insurance, product category, and in certain cases, different caps payable to an insurance agent and insurance intermediary.  This moves the regulatory focus away from prescribing specific caps, and rather allow insurer’s more freedom in managing these payments under overall expense caps that the IRDAI imposed.

All insurers are required to have a Board approved (and periodically reviewed) written policy on payment of commissions, which should consider eight key factors:

(a) policyholders’ interest;

(b) increasing insurance penetration and density;

(c) nature & tenure of insurance policy;

(d) interests of intermediaries;

(e) enhancing performance of intermediaries; commensurate to the insurer’s business strategy;

(f) introduce cost efficiencies in business and simplify administration;

(g) the policy should indicate the relative degree of importance placed on each of the factors set out above. 

This is a significant move forward for the insurance industry from a few critical viewpoints. First, the New Regulations are a good example of regulators moving towards principles-based regulations as opposed to being overly prescriptive, and provide a lot of the onus on the board of directors and audit committees of insures to ensure compliance with the regulations.  This should ease the conduct of insurance business and administration within insurance companies. The uncoupling of commissions specific to insurance products and the move towards overall expense management provides insurer’s more flexibility to spend intelligently to support more creative business models. Such greater creativity and flexibility should lead to better insurance penetration in India in the medium to long term, which has been the regulator’s constant focus for several years. The New Regulations should also provide an impetus to newer products, more engaged intermediaries (and perhaps new intermediaries focused on specific portions of the insurance market), and an increased bouquet of insurance products available to customers. While it will take some time to reap the benefits of these progressive measures by the IRDAI, the writing appears to be on the wall that the regulator is listening to the insurance industry and taking positive steps to align economic incentives with expansion of India’s insurance market.

Shuva Mandal is the Chairman and the Managing Partner of Fox Mandal & Associates LLP. Revered as an A-List Lawyer by the Indian Business Law Journal, he specialises in corporate, mergers & acquisitions, and private client advisory, in addition to providing general guidance in all the practice areas of the firm.

Rohan Singh is a Partner in the corporate practice of Fox Mandal & Associates LLP and has significant experience in a wide range of corporate transactions, including mergers and acquisitions, private equity, venture capital, joint ventures, and corporate restructuring.  He has advised leading domestic and foreign corporations, private equity and venture capital funds in complex transactions in multiple industry sectors.