The Insurance Regulatory and Development Authority of India (“IRDAI”) has notified the IRDAI (Payment of Commission) Regulations, 2023 (“Commission Regulations”) which replace the IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations, 2016 (“ErstwhileRegulations”). In addition to the Commission Regulations, the IRDAI has simultaneously overhauled the limits on expenses of management (“EoM”) by issuing the IRDAI (Expenses of Management of Insurers transacting Life Insurance Business) Regulations 2023 (“Life EoM Regulations”) (replacing the IRDAI (Expenses of Management of Insurers transacting life insurance business) Regulations 2016), and IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations 2023 (“Non-Life EoM Regulations”) (replacing the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations 2016).

Under the Commission Regulations, the product-wise cap under the Erstwhile Regulations has been removed and insurers can now determine commissions on their own as long as they are within the overall cap on EoM of insurers.

1. From product level commissions to company-wide limit on expenses

• With an aim to provide insurers the flexibility to manage their expenses based on their growth aspirations, the Commission Regulations have brought commissions paid by the insurers to insurance agents and insurance intermediaries under the specified overall EoM limits. Under the Erstwhile Regulations, the commissions were restricted to the per-product cap that IRDAI had set in the Erstwhile Regulations.
• Insurers will now have the flexibility to determine the commissions to be paid in respect of each product provided that the overall EoM of the insurance company is within the limits prescribed under the relevant EoM Regulations.
• The Erstwhile Regulations were unable to address the commercial requirements of a maturing Indian insurance market where distribution, and concurrently distribution commission, is hugely relevant. The flexibility that the Commissions Regulations will provide will enable insurance companies to devise new distribution and compensation models, and hopefully change the established market practice. This change coupled with (composite) corporate agents being allowed to distribute products of up to 27 insurers will lead to expansion of distribution channels by these players. A compensation system which is in line with market needs would perhaps limit the instances of breach that have been typical in the industry for the past several years.

2. Rationalisation of EoM

• For non-life insurance businesses, the Non-Life EoM Regulations now prescribe an overall limit based on the written gross premium in a financial year as 30% for general insurance business and 35% for health insurance business.
• Given the complexity of the life insurance business, the Life EOM Regulations have retained the variation in allowances for different segments (such as linked, non-linked, participating and non-participating). The percentage allowances for some of the segments have been increased.
• Both life and non-life insurers have also been allowed certain additional expenses towards setting up of branches in the international financial services centre certain government schemes for rural sector, insuretech and insurance awareness.

3. Commission – an all-encompassing compensation

• The Erstwhile Regulations created a distinction between commissions (compensation payable to insurance agents) and remuneration (compensation payable to insurance intermediaries). Any additional incentives were categorised as rewards. With the Commission Regulations, all the different heads of compensations i.e., commission, reward and remuneration have been subsumed into a simplified and inclusive concept of ‘commission’.
• The Erstwhile Regulations prohibited payment of rewards to insurance intermediaries with revenues from activities other than insurance intermediation being more than 50% of their total revenues from all the activities (e.g., banks). This restriction has now been removed with the inclusion of rewards within the all-encompassing concept of commission.

4. Board policy on commissions

• There has been no change in the requirement for the insurers to have a board approved policy for determining commissions. The IRDAI has issued a guidance note describing the key elements that should be included in the board policy including:
  (a) promotion of fair and transparent competition among intermediaries;
  (b) fair compensation regardless of the size or bargaining power of the intermediaries;
  (c) establishment of standard review process to be conducted annually by the audit committee;
  (d) oversight mechanism for market conduct by the intermediaries; and
  (e) regular monitoring and reporting.

Authors: Kunal Thakore & Deepa Christopher – Partners and Chhavi Singhal – Senior Associate