IRDAI’s proposed reforms will push adoption, make insurance buying more consumer-friendly, says chairman…

New business data points to the fact that The proposed overhaul of insurance distribution is likely to speed up the industry’s shift to digital, make buying insurance consumer-friendly and create new business and job opportunities, the sector regulator stated.

In an interview, IRDAI Chairman Ajay Seth stated the reforms aim to weed out inefficiencies in the distribution chain while creating employment opportunities. He stated greater transparency around commissions, claim payouts and distributor performance would let the market distinguish insurers and distributors that create genuine value for policyholders.

The Insurance Regulatory and Development Authority of India (IRDAI) unveiled a two-part consultation paper titled "Recalibrating Economics of Insurance Distribution" on September 23, proposing changes to commissions, expense limits and the way policies are sold and serviced.

"In fact, the expectation is that the changes will create more jobs as the system becomes more digital and requires new kinds of capabilities,” Seth told Moneycontrol in an interview.

“The first thing is expanding coverage. The way to do that is through easier entry, easier ways of doing business and softer compliance requirements. This allows small entrepreneurs, even in small markets, to start businesses. Allowing non-insurance businesses will gain topline opportunities. That should lead to more businesses entering the market, greater competitive pressure and, ultimately, more employment," stated Seth

The Reserve Bank of India's Financial Stability Report had flagged that premium expansion in the sector was increasingly being fuelled by high-cost distribution rather than genuine operating efficiency.

IRDAI's own reading of the numbers found that promotional expenses, brand fees and rewards were pushing total distributor payouts 30-60 percent above base commissions, effectively masking the real cost of selling a policy, a gap the new paper seeks to close.

Digital shift, keeping traditional distribution relevant

A large part of the reform package is aimed at pushing the industry towards digital channels, an area where Seth stated the insurance sector was lagging behind other segments of the financial sector.

“Digitalisation has to become a much bigger part of insurance than it is today. Other financial sectors have moved significantly towards digital processes. You can open a bank account without visiting a branch, while mutual fund and capital-market transactions can largely be undertaken digitally. Insurance cannot continue doing business in the same way it is doing today," Seth stated.

At the same time, he stated traditional distribution would stay relevant, with agents and other intermediaries anticipated to increasingly adopt digital tools rather than being replaced by them. Making product information more easily available, he stated, could make consumers more comfortable buying insurance on their own. Rollout next year?

The reforms are being examined for implementation from next year, with January 1 or April 1 under consideration, Seth stated. The final framework, that stated, will be prepared after taking stakeholder feedback on the consultation paper into account and examining all comments.

"The objective is to get the reforms right rather than implement them in a piecemeal manner. We have tried to look at the entire distribution ecosystem comprehensively and address different issues together," he stated.

Fixing mis-selling accountability

The consultation paper additionally proposes measures on mis-selling, compulsory bundling, indirect remuneration and digital dark patterns, along with greater transparency and accountability in how policies are sold.

Seth stated accountability for mis-selling should ultimately rest with the person who deals directly with the customer and the organisation for which he does that and which is responsible for his conduct.

"There has to be someone who leads the solicitation and takes responsibility for the sale in every distribution channel. Accountability has to be there. As a result, while the IDE or the Insurer for whom the person solicits is responsible for his/her conduct, every sale has to be linked to the person who actually solicits and advises the customer, based on the role played and the conduct that is documented," he stated.

The proposed Public Insurance Registry, or PIR, could maintain a structured record of sales personnel performance and conduct, covering sales quality, renewals, persistency, surrenders, complaints and instances of mis-selling.

A related goal of the overhaul is to bring down the cost of doing business without letting the resulting efficiency upside simply turn into elevated margins for insurers. Seth stated the cost of business for private life insurers as a whole is around 22 percent, while some insurers manage to operate at considerably softer marks.

"If some insurers are able to operate at a much softer cost, why are others still operating at significantly elevated marks? New firms can obviously have elevated costs in the initial years because they are building their business, but there are additionally insurers that have been operating for more than two decades and keep have high costs," he stated.

Over time, he stated, this efficiency should translate into softer premiums, or at least a slower pace of gain, with better returns for life insurance policyholders in particular. "We will additionally keep an oversight on where the savings from greater efficiency are going. The objective is that policyholder value is increased and firms do so with optimal margins," Seth stated.

Jobs propel, new opportunities

Seth stated concerns that softer expense limits and commission caps could hurt employment in the distribution ecosystem were misplaced, arguing that the broader package of reforms should widen, not shrink, the pool of people selling insurance. He pointed to Common Service Centres, private agricultural cooperative societies and self-help groups as channels that could be opened up further, particularly outside big cities.

"We additionally need to look at the people already present in rural areas. Common Service Centres, for example, have a large reach but are at present restricted in the products they can sell. If people there are trained and allowed to distribute more products, insurance can become an additional source of income," he stated.

The regulator has additionally proposed additional commission for business sourced from underserved areas, including rural areas and smaller towns and cities, to account for the elevated effort involved in last-mile distribution.