Health insurance portability: IRDAI wants to curb commission-led switching

The latest market report highlights that Health insurance portability allows policyholders to move from one insurer to another while continuing their insurance coverage. But the Insurance Regulatory and Development Authority of India (IRDAI) wants to ensure that such switches are fuelled by customer choice rather than commissions paid to distributors.

In its consultation paper on distribution reforms, IRDAI has specifically proposed discouraging commission-led portability of health and motor insurance policies.

Softer commissions for renewals and portability

The consultation paper states, "Renewal of policies of products with high demand and awareness of policyholders should have much softer commissions than that on first-time sales, e.g., health insurance."

The idea is to differentiate between acquiring a new customer and servicing an existing policyholder. Health insurance is a product that customers are generally familiar with, and renewal does not necessarily involve the same level of sales effort as a first-time purchase.

The paper additionally proposes, "Commission-led portability of health or motor policies should be discouraged." This means the regulator wants to reduce situations where a policyholder is encouraged to shift insurers primarily because of the commission available to the distributor.

What is the proposed commission structure?

The consultation paper lays out separate proposed commission limits for health insurance. For individual health policies, the proposed maximum commission for distribution entities is 15 percent for first-time sales, compared with 5 percent for renewals and 5 percent for portability.

For agents and associates, the proposed limits are 20 percent for first-time sales, 10 percent for renewals and 10 percent for portability.

The softer limits for renewals and portability reflect IRDAI's broader principle that commissions should be linked more closely to the effort involved in selling and servicing a policy.

Why does this matter to policyholders?

A health insurance switch can affect a customer's coverage, pricing and continuity of the policy. The consultation paper's proposal is aimed at making sure that the decision to port is not fuelled primarily by distributor remuneration.

IRDAI has additionally proposed, "Single premium products and products with tax incentives should have softer commissions."