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MOSL: INSURANCE: IRDAI releases draft guidelines revamping the commission structure

INSURANCE: IRDAI releases draft guidelines revamping the commission structure

• IRDAI has issued a draft set of guidelines, revamping the commission structure for the Insurance sector. This is a step in the right direction as it carries the potential to enhance persistency, cost metrics, and penetration of Life Insurance in the country.
• The regulation will usher in greater discipline in the sale of insurance products as it links the commission rate of intermediaries to the persistency status of the policies sold unlike the earlier regime, where payouts were based on the premium paying term.
• The draft benefits players operating with a lean cost structure as it allows companies with expenses of management (EoM) at sub-70% of allowable limits to design a customized commission structure as per the board approved policy. This can drive a product mix of choice and boost margin and VNB.
• Over the past few months, under the leadership of the new Chairman, IRDAI has stepped on the reforms pedal in areas like single limit for EoM, additional allowances for incremental rural sector exposure and InsureTech, implementation of Ind AS and Insurance awareness, among others. It is also working on a proposal to move towards a risk-based capital framework to ensure optimum utilization of capital, in line with global practices.
• We maintain our positive stance on the sector. While we are watchful of the upcoming regulations and the possible implications for life insurers, we appreciate the IRDAI's vision to boost growth and drive higher penetration in the country.

The draft guidelines aim at improving persistency and penetration levels

The current set of regulations, proposed by IRDAI, is in the draft stage and will be finalized after receiving feedback from all stakeholders. Nevertheless, it is a step in the right direction as it simplifies the existing commission framework; facilitates the development of new business models, products, and strategies; and eases compliance requirements. The draft regulations seek to adequately incentivize agents and insurance intermediaries as commission rates will be linked to persistency rate v/s the policy tenure-based payout that prevails currently. Kindly refer to Exhibit 1 and 2 for further details.

 

Customized commission structure for players with a lean cost structure

The draft regulation seeks to simplify the existing structure and aims to drive further growth and development. It rewards players with actual EoM in the preceding fiscal lower than 70% of allowable EoM limits. Such players can either design their own commission structure, as per the board approved policy, or adopt the limits laid out in Schedule I of the draft. On the basis of our interactions, actual EoM for some of the top life insurers are below 70% of allowable EoM limits. This introduces flexibility to design a customized commission structure, which can drive a product mix of choice. For the others with a higher ratio, it will create an aspiration to attain a ratio below 70%.

More skin in the game for intermediaries and Insurance agents

The draft guidelines will usher in greater discipline in the sale of insurance products as it links the commission rate of intermediaries to the persistency status of the policies sold. This is unlike the earlier regime where a product with a longer premium payment term earned a higher upfront commission, irrespective of future persistency trends. To balance this partly, the commission on renewal premium has been increased in the draft. Overall, we expect the new structure to improve penetration and drive higher growth.

Higher flexibility for players with a first-year commission rate of sub-20%

As per our preliminary discussions and assessment, the proposed regulation increases flexibility for players with a first-year commission rate of sub-20%. The regulation caps first-year premium on regular premium products at 20% at the company level. Thus, players operating within this limit can offer greater incentives to intermediaries to drive a product mix of their choice. This, in turn, can have a positive impact on margin and Value of New Business (VNB). SBILIFE has the lowest first-year commission rate at 8%, while other private peers operate in the 17-18% range. LIC has a higher rate at 26%. Since most of the smaller players operate at a higher rate, they will be adversely affected if the draft guidelines come into being in its current form.

Higher reliance of LIC on Single Premium products, driven by Annuity

LIC’s product mix is dominated by the Group segment, with a 72% share of NBP in FY22. This is due to a higher reliance on the Single Premium Annuity and Pension products, which constituted 38% of total premium in FY22. Renewal premium contributed 54%, while the share of first-year/regular premium products stood at 9%. The commission rate for LIC in FY22 was 5.4%, higher than its top three private peers (in a 3.7-4.5% range) due to greater reliance on the agency channel. While the commission rate on single premium products is extremely low at 0.3% (due to the Group business), cost of sourcing Individual regular premium business is high at 26.5%, driven largely by sole dependence on the agency channel, with a dominant mix of the traditional business.

IRDAI steps on the reforms pedal, more on the way

Over the last few months, IRDAI tasked several working groups to conduct a comprehensive review of existing regulations and suggest changes for the development of the sector. Some of the key changes are being proposed in the following areas — single EoM limit, additional allowances for incremental rural sector exposure and specified schemes, additional allowances for expenses towards InsureTech, implementation of Ind AS and Insurance awareness, discontinuation of the segmental compliance and its reporting, and rationalization of other compliance requirements. It is also working on a proposal to shift towards a risk-based capital framework to ensure optimum utilization of capital, in line with the practice adopted by other countries. This will enhance the solvency ratio of Indian life insurers and ensure availability of adequate capital for further growth.