Removal of commission caps for insurance agents likely to boost innovation, customer-centricity

• It will give more flexibility to insurance companies to determine what amount of commission they wish to pay to the insurance agents.
  
• The removal of the cap 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 high-quality service.

The Insurance Regulatory and Development Authority of India (IRDAI) has removed the cap on commission payments to agents and brokers. While there will still be an overall cap on expenses of management of insurers, the sub limit on commissions have been removed. Expenses of management includes all operating expenses of an insurance company.

“The regulatory change announced by IRDAI to remove individual commission payment limits is a major and long-awaited reform in the insurance sector. This shift is anticipated to benefit insurers in a variety of ways, including increased product innovation, the development of new distribution models, and a more customer-centric approach to operations,” says Sanjiv Bajaj, joint chairman and managing director, Bajaj Capital Insurance Broking.

Increased product innovation

The removal of the cap on agent commissions will enable insurers to allocate their resources more effectively. “This policy change will encourage insurers to focus on developing new and innovative products,” says Prashant Tripathy, MD and chief executive officer, Max Life Insurance. This development is likely to help in the proliferation of more insurance policies being sold.

Companies can introduce new products that cater to all sections of society, thereby penetrating new and previously untapped markets. “The elimination of the commission payment limit is expected to increase competition among insurers, as they will be able to offer more appealing policies and better pricing to customers,” says 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 high-quality service. “This could lead to a more customer-centric approach to business and the development of products and services that better meet the needs of customers,” says Bajaj.

More flexibility to manage expenses

This will give more flexibility to insurance companies to determine what amount of commission they wish to pay to the insurance agents. This will also increase sales and business.

Says Joydeep Roy, partner, PWC, India financial services advisory leader, “Insurers can now decide what commissions they pay for what products and to which distributor. Especially in micro-insurance, the premiums are low, so a premium percentage cap hurts distributors.” That is going to change now.

Agrees Bahroze Kamdin, partner, Deloitte India, “So if it is a normal product, insurance companies may pay a lower commission, if it is a new product they may pay higher commissions,” says Kamdin.

New distribution models

The removal of the cap on commission payments could also lead to the development of new distribution models, which could help insurers reach a wider range of customers. This could in turn lead to increased insurance penetration in India, particularly in remote or underserved areas.

Until now, insurance companies were operating under regulated commission structures. This created a challenge for companies as it was difficult to incentivise agents based on their performance. “However, with the recent development by IRDAI, insurance companies now have the freedom to evolve their compensation philosophy. This implies higher pay for higher performance and allows companies to recognise and reward agents who demonstrate higher persistence, therefore retention rates,” says Kumar.

Roy believes that it will also help insurance companies to set goals for distribution. Not only will sales matter, but distributors may be incentivised (or penalised) on other parameters like quality of business, better quality of customers, better data collection, and so on, leading to healthier business.

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