Reports indicate that life insurance companies are nearing an agreement to impose a 30 percent cap on commissions paid to corporate agencies, which encompass banks and non-banking financial companies (NBFCs), for credit life policies.
Discussions on this matter have transpired during meetings of the Life Insurance Council in recent months, according to two sources cited by The Economic Times. While the formal announcement from the council is still pending, insiders have disclosed that discussions are in an advanced stage with the goal of establishing self-regulation in this context.
This development is occurring as the insurance industry adjusts its marketing practices in response to a decision by the Insurance Regulatory and Development Authority of India (IRDAI) to transition from product-specific commission structures to an overall cap on expenses within insurance companies. This shift was prompted by insurers facing allegations of Goods and Services Tax (GST) evasion. IRDAI is the regulatory authority overseeing the insurance sector.
The issue at hand traces back to March when the IRDAI introduced the IRDAI (Payment of Commission) Regulations, moving from the conventional product-specific commission structure to an overarching cap on expenses within insurance firms. The directive mandated the management of operations within a 30 percent overall expense limit. Although insurers were permitted to pay commissions at a rate of 5 percent until March, they often opted for higher overriding commissions, exceeding 30-35 percent or more, to boost market share.
In specific partnerships between insurers and banks or NBFCs, where a housing loan of ₹1 crore was linked with a policy sum assured of the same amount, the premium escalated to 35 percent from the 5 percent rate that was applicable until March.
Credit life insurance, which is designed to facilitate loan repayment in the event of the insured person’s demise before full repayment, has experienced a notable surge in premiums. While the policy is optional, its cost is added to the loan principal.
The alteration in commission structures was prompted by scrutiny from Goods and Services Tax (GST) authorities, which issued show-cause notices to various insurance companies. The investigation uncovered instances in which insurers paid overriding commissions to agents through vendors, misclassifying these payments as marketing, advertising, and manpower supply expenses. As a result, they were evading tax without receiving actual services in return.
Numerous insurance companies are now under investigation for providing overriding commissions to banks and intermediaries in addition to regular commissions. This practice has raised concerns about potential exploitation and an upswing in management expenses within the insurance sector.
The investigation further revealed that insurance companies were covering banks’ employee costs through intermediaries, which were not transparently represented in their financial records. This led to non-disclosure and potential violations of tax laws.