Financial Services Risk: Regulatory updates - Insurance

IRDAI’s regulatory reform: Moving towards principle-based regulations

Insurance is a complex product that promises compensation to the insured or third parties, such as nominees, under specific terms and conditions in the event of a covered contingency. Typically, an insurance intermediary or individual insurance agent acts as a bridge between consumers and insurance companies.

Ensuring fairness and transparency in these transactions requires regulatory oversight. The Insurance Regulatory and Development Authority of India (IRDAI) oversees the limits on insurance companies' Expenses of Management (EoM) as per Sections 40B and 40C of the Insurance Act, 1938. Section 40 of the Act mandates that insurers can only pay commissions to agents and intermediaries regulated by the IRDAI.

Traditionally, regulators closely monitored compensation for insurance agents, brokers, and intermediaries, ensuring that insurance companies adhered to legal limits on commissions. In March 2023, the IRDAI amended regulations concerning EoM and commission payments, transitioning from specific segment caps to broader company-wide limits subject to the overall adherence to the EOM limit. 

Insurance companies now have the discretion to manage fixed costs and commissions according to models that best fit their operations. This allows stakeholders to optimise expense management and distribution costs, potentially leading to more competitive pricing structures that benefit consumers. 

IRDAI’s regulations mark a transition from rule-based to principle-based regulation of commissions paid to insurance agents and intermediaries. This aims to promote sustainable growth, safeguard policyholder interests, drive innovation, and strengthen the insurance industry.

Key benefits for the industry

Shift from product-level commissions to a company-wide limit of expenses

• Establishes uniformity across different business models
• Provides insurers with increased flexibility in expense management

Removal of the cap on commission payments

• Boosts the insurance sector by enabling enhanced product innovation.
• Facilitates the creation of new product distribution models and customer-centric operations.

Beneficial for distribution-led business models

• Allows additional expense allowances for insurtech, insurance awareness, and rural and social schemes

Enhances regulation’s responsiveness to market innovation

• Facilitates the development of new business models, products, and strategies
• Ensures easy compliance with regulations while achieving regulatory objectives

Encourages a more transparent and flexible environment

• Long-term benefits include more robust, well-designed, cost-effective product offerings from financially stable organisations

Financial Services Risk: Regulatory updates - Insurance

December 2023 to March 2024

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