Credit Life Policies Is Likely To Witness 30 % Commission Cap

By Consultants Review Team Monday, 16 October 2023

According to persons familiar with the situation, life insurance firms are close to agreeing to put a 30% restriction on fees paid to corporate agencies, such as banks and non-banking financial companies, for credit life policies.

It comes as the industry reorients marketing practices in the aftermath of the regulator's decision to abandon product-based caps in favor of company-based ones in the aftermath of insurers facing GST evasion charges.

According to two people with knowledge of the situation, the issue has been discussed in Life Insurance Council meetings during the last few months. While the council has not yet issued an official letter, they stated that discussions to implement self-regulation are well underway.

In some joint ventures between insurers and banks or housing finance businesses, where a 1 crore home loan corresponds to a policy sum assured of the same amount, the premium has risen to 35% from 5% until March.

Credit life insurance is a sort of life insurance that is meant to assist with debt repayment if the insured person dies before the loan is entirely repaid. While this policy is optional, if it is chosen, its cost is added to the loan's principal amount.

"Now, discussions are underway to limit the commission to 30% to avoid an undue burden on borrowers," stated an unnamed life insurance executive.

The insurance regulator announced the IRDAI (Payment of Commission) Regulations in March, which moved away from the traditional product-specific commission structure and imposed an overall cap on expenses within insurance companies, as well as asked insurance companies to manage operations within a 30% overall expense limit. While insurers were permitted to pay 5% commissions until March, they frequently paid huge overriding commissions of 30-35% or even higher to acquire market dominance.

"When issuing the guidelines, the regulator mentioned protecting consumers' interests in insurance policies and the associated commissions." So, while the regulator has shifted from a rule-based to a principal-based approach, it may not intervene but expects the industry to impose self-discipline," the CEO of a mid-sized insurance business said on condition of anonymity. The change in commission structures followed an investigation by the GST authorities, who issued show-cause notices to several insurance companies after discovering that insurers were paying overriding commissions to agents through vendors under the guise of marketing, advertising, and manpower supply costs, thereby evading tax.

Many insurance companies have been scrutinized for paying overriding commissions to banks and intermediaries on top of standard commissions. This practice has prompted worries in the insurance business regarding potential exploitation and an increase in management costs. The study discovered that insurance firms were financing bank employee costs through intermediaries that were not properly represented in their financial records, resulting in non-disclosure and potential tax offenses.


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