Eliminating commission caps for insurance agents is likely to encourage innovation and customer focus

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  • It gives insurance companies more flexibility to determine how much commission they want to pay to the insurance company insurance agents.
  • The abolition of the limit on commission payments would also lead to the development of new distribution models.
  • With the potential for increased competition, insurers may need to focus more on meeting customer needs and providing quality service.

The Insurance Regulatory and Development Authority of India (IRDAI) has removed the limit on commission payments to agents and brokers. While there is still a general cap on insurer management costs, the sub-limit on commissions has been removed. The management costs include all operational costs of an insurance company.

“The regulatory change announced by IRDAI to remove limits on individual commission payments is an important and long overdue reform in the insurance industry. This shift is expected to benefit insurers in several ways, including increased product innovation, the development of new distribution models and a more customer-centric approach to operations,” said Sanjiv Bajaj, co-chairman and general manager of Bajaj Capital Insurance Broking.

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Increased product innovation

The abolition of the broker commission cap will allow insurers to allocate their resources more effectively. “This policy change will encourage insurers to focus on developing new and innovative products,” said Prashant Tripathy, MD and CEO of Max Life Insurance. This development is likely to contribute to increasing sales of insurance policies.

Companies can introduce new products suitable for all walks of life, entering new and previously untapped markets. “The abolition of the commission payment limit is expected to increase competition among insurers as they can offer customers more attractive policies and better prices,” said Vishnu Kumar, chief distribution officer, Aviva India.

With the potential for increased competition, insurers may need to focus more on meeting customer needs and providing quality service. “This could lead to a more customer-centric approach to doing business and the development of products and services that better meet customer needs,” says Bajaj.

More flexibility to manage expenses

This gives insurance companies more flexibility to determine how much commission they want to pay to the insurance agents. This will also increase sales and business.

Joydeep Roy, Partner, PWC, India Financial Services Advisory Leader, says: “Insurers can now decide which commissions to pay on which products and to which distributor. Premiums are especially low in micro-insurance, so a premium percentage cap harms distributors.” That will now change.

Agrees Bahroze Kamdin, Partner, Deloitte India: “So if it’s a regular product, insurance companies might pay a lower commission, if it’s a new product they might pay a higher commission,” says Kamdin.

New distribution models

The abolition of the limit on commission payments could also lead to the development of new distribution models that would enable insurers to reach a wider range of customers. This, in turn, could lead to greater insurance penetration in India, particularly in remote or underserved areas.

Until now, insurance companies have worked with regulated commission structures. This created a challenge for companies, as it was difficult to incentivize agents based on their performance. “However, with the recent development by IRDAI, insurance companies now have the freedom to develop their reimbursement philosophy. This implies higher pay for better performance and allows companies to recognize and reward agents who demonstrate more persistence, hence retention rates,” says Kumar.

Roy thinks it will also help insurance companies set distribution targets. Not only sales matter, but distributors can be incentivized (or penalized) on other parameters such as quality of business, better quality of customers, better data collection, and so on, leading to healthier business.

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