The Insurance Regulatory and Development Authority of India (IRDAI) has signaled stringent changes to the sales and commission system for motor vehicle insurance, following its focus on health insurance. Currently, insurance is often purchased from the same dealer where the car or bike is bought when purchasing a new vehicle. This arrangement means customers do not have sufficient opportunity to compare policies and prices from different companies. IRDAI is working to change this entire process. If the regulator's new proposals are implemented, vehicle owners may gain more options and clear price information when buying insurance.
Issue of High Commission on Motor Insurance
IRDAI has expressed concern regarding the commission associated with motor insurance sales in its public consultation paper, 'Recalibrating Economics of Insurance Distribution'. According to the regulator, the commission in motor insurance can range from 13% to 50% under different circumstances, averaging around 24%. The regulator presented data concerning Original Equipment Manufacturer (OEM) brokers and Motor Insurance Service Providers (MISPs) related to the sale of new and used vehicles. In these channels, the average commission was reported to be around 24%, reaching up to 31% in some cases. During the financial year 25, approximately ₹29,000 crore in premiums were collected through these channels, with about ₹7,050 crore distributed as commission. IRDAI is questioning whether such a high commission cost is justified across all types of motor insurance products, including those of relatively simple nature.
Potential Changes for the Customer
A primary objective of IRDAI's proposal is to provide customers with more choices instead of relying on a single point. The insurance regulator has suggested making new and used vehicle insurance products available on digital platforms like Market Infrastructure Institutions (MII), potentially involving platforms such as Bima Sugam. Such platforms aim to give the customer direct access to various options; meaning, if the customer does not want to buy insurance through the dealer, other avenues will be available to them. IRDAI has also proposed that no more than 5% of the premium should be charged to recover costs on these non-profit digital platforms.
Dealers Will Have to Show Alternative Options
If these proposals are implemented, the role of vehicle dealers will also change. Dealers will be required to clearly display MII platforms and QR codes. The goal is to ensure that the customer knows they can purchase insurance through channels other than the dealer. Thus, when buying a new car or bike, the customer will not be limited to only the insurance offered by the dealer but will be able to make a decision after knowing about other available options.
Monitoring Insurance Purchase with Loans
IRDAI has also raised questions about insurance sales with banks and NBFCs providing vehicle loans. According to the regulator, approximately 16% commission was observed in cases where loans and insurance were bundled together. What is important for the customer here is that they must receive clear information while taking a loan about where and at what price the insurance is being taken out. The proposed changes aim to increase transparency in such arrangements.
Questions Raised on Used Vehicle Insurance
IRDAI has not only focused on the sale of new vehicles; it has also questioned the commission structure in used vehicle insurance. According to the insurance regulator, even though many dealers have their own service and repair facilities, MISPs receive an average commission of about 12% on used vehicle insurance. A balance between commission and actual service needs to be established in such cases as well.
Dealer Cannot Impede Cashless Repairs
Another significant aspect of the proposal for customers relates to cashless repairs. IRDAI has proposed that no dealer should refuse cashless repairs simply because the customer did not purchase the motor insurance from that specific dealer. This means that if the customer has taken a policy from another insurer and cashless repair facility is available under the policy, this facility cannot be denied merely on the basis of being separate from the policy-selling dealer.
Proposal to Restrict Incentives on Dealers
IRDAI has also expressed concern over agreements between Original Equipment Manufacturers (OEMs) and Insurance Distribution Entities (IDEs) that offer additional incentives or benefits based on policy sales. The proposal calls for a ban on such service level agreements and incentive schemes that might be detrimental to the policyholder. The insurance regulator argues that such provisions can affect the competition in options and prices available to the customer.
Proposal to Reduce Commission on Third-Party Insurance
Third-party cover is mandatory in motor insurance. IRDAI has proposed keeping very low commissions for mandatory third-party insurance and simple motor insurance products. That is, the regulator wants to reconsider high commission costs even for policies that do not require much advice or service to sell. The proposed commission structure will take into account factors such as the product, the distribution channel, and the effort involved in selling and servicing it.
