Before this change, insurance companies were bound by a cap on commissions, with a limit of 35% and another 35% on the OverRide Commission (ORC). This had led to many queries revolving around ORCs and compliance with Goods and Services Tax (GST) norms.
“With the recent regulatory change, ORCs are now legal, and companies that were run by banks and compliant with GST norms are expected to see an increase in commissions,” an insurance executive said.
The replacement of regulator-dictated commission caps with a board-approved commission policy, which came into force on April 1, 2023, has abolished the separate cap on commission across life, general, and health insurers. Instead, it has prescribed an overall Expense of Management (EoM) cap of 30% for general insurance and 35% for health insurance, while allowing companies to have a board-approved commission payment policy. By changing the rules, the insurance regulator wants to move away from micromanaging and provide flexibility.
While some insurance companies have been known to pay significantly inflated commissions to banks and agencies by several means like supplying them with office staff to sell insurance policies or pay for advertising, the new rules will make payouts simple.
“Insurers were pursuing rapid growth and willing to offer high commissions. With this change, the regulator has shifted the responsibility to manage commission structures to the insurance companies, instead of micromanaging them,” a source said.
General insurance companies plan to revamp their commission structure for motor original equipment manufacturers (OEMs) and retail health intermediaries, the sources said. Previously, they were paying a commission of 19.5% for motor own damage, and a total of 42% after adding ORCs, said the sources. To secure third-party motor insurance business, insurers were paying as high as 35% in commission including ORCs, exceeding the prescribed limit of 2.5%. For instance, commissions for school buses were reaching as high as 60-65%, far beyond the allowed limit, the sources said.Similarly, for the retail health business, another rapidly growing and profitable segment, insurers were paying commissions ranging from 40-45%, surpassing the prescribed limit of 19.5%.
While the removal of explicit commission caps, IRDAI aims to bring transparency to payouts to distributors, and larger institutional distribution channels such as banks, NBFCs, and brokers who are likely to see increased payouts.
With the board of most insurance companies likely to meet over the next few weeks to design the new commission payment structure, it will be known whether insurers alter payouts significantly or stick to profitability.