It comes as the industry reorients marketing practices following the regulator’s decision to scrap product-wise caps and go for company-wise ones in the wake of insurers facing GST evasion charges.
The matter has been discussed in Life Insurance Council meetings over the past few months, said two persons privy to the information. While the council has not sent a formal letter yet, talks are at an advanced stage to put in place self-regulation, they said.
In some partnerships between insurers and banks or housing finance companies, where a housing loan of ₹1 crore corresponds to a policy sum assured of same amount, the premium has increased up to 35% from 5% till March.
Credit life insurance is a type of life insurance designed to help in loan repayment if the insured person passes away before the loan is fully repaid. While this policy is optional, if it is chosen, its cost is added to the loan’s principal amount.
“Now, discussions are ongoing to limit the commission to 30% to prevent an undue burden on borrowers,” said a life insurance executive, who did not wish to be identified.In March, the insurance regulator had announced the IRDAI (Payment of Commission) Regulations, which moved away from the traditional product-specific commission structure and placed an overall cap on expenses within insurance companies, and asked insurance companies to manage operations within an overall expense limit of 30%. While insurers were allowed to pay 5% on commissions until March, they often resorted to paying hefty overriding commissions of 30-35% or even higher to gain market share.
“The regulator, while issuing the guidelines, talked about protecting consumers’ interests on insurance policies and the associated commissions. So, while the regulator moved away from rule-based approach to principal-based, it may not intervene but expect industry to impose self-discipline,” the CEO of a mid-sized insurance company said on condition of anonymity. The change in commission structures followed scrutiny from the GST authorities, which issued show-cause notices to several insurance companies after they found that insurers were paying overriding commissions to agents through vendors, under the pretext of marketing, advertising and manpower supply costs, without any services being rendered, thereby evading tax.
Many insurance companies have come under scrutiny for the payment of overriding commissions to banks and intermediaries, in addition to regular commissions. This practice has raised concerns about potential exploitation and an increase in management expenses within the insurance industry. The investigation revealed that insurance companies were covering the employee costs of banks through intermediaries, which were not transparently represented in their financial records, resulting in non-disclosure and potential violations of tax laws.