June 26, 2019
Key notes (General Insurer) | Corporate agency and remuneration / commission
I. Arrangements with insurance corporate agents: The IRDAI is empowered to license intermediaries, such as insurance corporate agents for 3 years at a time.1 The principal set of regulations for corporate agency licensing, code of conduct, material inclusions in corporate agency agreements and the IRDAI’s oversight of insurance corporate agency arrangements is the IRDAI (Registration of Corporate Agents) Regulations, 2015 (“CA Regulations”).2 Significant compliance provisions include:
II. Regulation of Remuneration, Commission and Reward10: Only insurance agents and insurance intermediaries such as insurance corporate agents are permitted to receive remuneration, commission or reward for soliciting, procuring and servicing insurance products.11 The IRDAI regulates12 commission, remuneration and reward and prescribe caps under the IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations, 2016 (“Commission Regulations”).
REMUNERATION CAPS FOR GENERAL INSURANCE (NON-MOTOR) POLICIES20
REMUNERATION CAPS FOR GENERAL INSURANCE (MOTOR) POLICIES21
Maximum Commission / Remuneration as percentage of premium allowed for motor insurance policies
Distribution Fees received by Motor Insurance Service Providers (“MISP”)23
If the MISP is sponsored directly by an insurer, the MISP will receive distribution fees directly.24 However, if the MISP is sponsored by an insurance intermediary, then it shall receive distribution fees through an insurance intermediary. The following table sets out the maximum distribution fees payable to the MISP.
Subsequently, the General Insurance Council clarified that (i) commission / remuneration on TP portion of premium would be available from the 4th year onwards (i.e. from the 3rd renewal) and would be 2.5% (for both standalone and package cover) under the MISP Guidelines; and (ii) the reward of 30% of commission / remuneration under other than health segment would be allowed on TP portion of both standalone and package motor insurance policies sold through an MISP26 The IRDAI has clarified that, for annual motor TP (both standalone TP and TP portion of package), the distribution fee inclusive of reward will be 2.5%+30% reward i.e. 3.25%.27
Commission, Remuneration, Reward and Distribution Fees for Long Term Motor Insurance Policies28
1 Section 42D of the Insurance Act, 1938.
2 The CA Regulation were preceded by exposure drafts which appeared to encourage open architecture insurance distribution. Open architecture was first mooted in respect of banks and non-banking financial companies such that they would act for more than one insurance company through the bancassurance model (i.e. by registering as either a bancassurance corporate agent or a bancassurance broker). On 23 November 2011, the IRDAI published an exposure draft of the IRDA (Licensing of Bancassurance Agents) Regulations, 2011; and on 9 October 2012, the IRDAI published the exposure draft of the IRDA (Licensing of Bancassurance Entities) Regulations, 2012. While both of these sets of exposure drafts indicated IRDAI’s policy movement towards discouraging / prohibiting exclusive insurer-insurance intermediary tie-ups, these were not finally notified given stakeholder feedback at the time.
3 Each type of corporate agent can tie-up with a maximum of three insurers of that particular class.
4 General insurance corporate agents are also subject to a total sum insured cap of INR 5 Crores per risk for all insurance combined.
5 Regulation 21(iii) of the CA Regulations.
6 Regulations 23(g) and (h) of the CA Regulations.
7 Paragraph II(ii)(p) of Schedule IIII to the CA Regulations.
8 Regulation 23 of the CA Regulations.
9 Regulation 20 of the CA Regulations.
10 Regulation 7 requires all insurers to submit a return of all such payments made within 45 days from the end of the relevant financial year. This needs to be reviewed by the insurer’s audit committee and approved by its board, as well as signed by its CEO and Compliance Officer.
11 Section 40(1) of the Insurance Act, 1938.
12 Pursuant to Section 31B of the Insurance Act, 1938
13 Regulation 5 of the Commission Regulations.
14 Regulation 6(c) prohibits providing any reward to an insurance intermediary which earns more than 50% of its total revenue from non-insurance activities (e.g. a bank).
15 Regulation 6(e) of the Commission Regulations.
16 Regulation 4 of the Commission Regulations.
17 Regulation 2(e) defines ‘remuneration’ as the compensation paid by an insurer and received by an insurance intermediary for soliciting and procuring an insurance policy.
18 Regulation 2(c) defines ‘commission’ as compensation paid to and received by an insurance agent from an insurer for soliciting and procuring an insurance policy.
19 Regulation 2(f) defines ‘reward’ as amount paid (directly or indirectly) as an incentive (by whatever name called by the insurer) to: (i) an insurance agent towards benefits such as gratuity, term insurance cover, various group insurance covers, telephone charges, office allowances, sales promotion gift items, competition prizes and such other items; (ii) an insurance intermediary towards services such as risk analysis, gap analysis, plan design, predictive modelling, data management, infrastructure, advertisement and such other items including any additional incentives by whatever name called.
20 As per Schedule III of the Commission Regulations.
21 As per Schedule IV of the Commission Regulations.
22 Revised pursuant to the second amendment to the Commission Regulations notified on October 10, 2017.
23 As per Paragraph 15(5) of the IRDAI’s Guidelines on Motor Insurance Service Provider dated August 31, 2017.
24 The MISP Guidelines prohibit the MISP or any of its associate companies from receiving (directly or indirectly) from the insurer (and from the insurer making such payment) any fees, charges, infrastructure expenses, advertising expenses, documentation charges, legal fees, advisory fees, or any other payment by whatever name called, except for permitted fees (i.e. distribution fees under the MISP Guidelines).
25 The MISP Guidelines prohibit an insurer from paying both remuneration & reward and distribution fees on the same motor insurance policy.
26 IRDAI circular IRDA/ INT/ CIR/ MISP/ 142/ 09/ 2018 dated September 4, 2018.
27 As per an email dated December 7, 2017 from the Secretary General of the General Insurance Council, referred to in IRDAI circular IRDA/ INT/ CIR/ MISP/ 142/ 09/ 2018 dated September 4, 2018.
28 Notified by IRDAI on August 29, 2018 pursuant to IRDA/ INT/ CIR/ Comm/ 139/ 08/ 2018. Long term insurance policies were required to be issued by al general insurance companies (i.e. 3 year third party insurance cover for new cards and 5 year third party insurance cover for new two-wheelers) pursuant to the Supreme Court’s judgement in Write Petition No. 295 of 2012 – S. Rajaseekaran v. Union of India and Others.
29 As per Schedule II of the Commission Regulations.
30 Applies to health insurance policies issued by general insurers and standalone health insurers.
31 Includes annual premium, 3 years single premium and 3 years regular premium.
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