Life Insurance Commissions: IRDAI Proposes Caps Based on Premium Payment Term
Life insurance commissions could be capped based on the premium payment term under IRDAI’s proposed distribution reforms.
Life insurance commissions may face new caps under IRDAI’s proposed norms, linked to the premium payment term.
Life Insurance Commissions: Suppose a policyholder pays a first-year premium of Rs 1,00,000 on a life insurance policy with a payment term of 10 years or more. Under a new proposal from the Insurance Regulatory and Development Authority of India (IRDAI), the most an agent could earn from that premium in the first year is Rs 25,000, while a distribution entity, such as a bank or a corporate agent, could earn at most Rs 20,000.If the same amount were paid as a single premium on an individual savings policy, the ceilings would fall to Rs 2,000 for an agent and Rs 1,000 for a distribution entity.
The figures are illustrative, but the rates behind them come from a consultation paper in which the regulator proposes to limit how much of a life insurance premium can go to the people who sell it. The paper covers individual linked and non-linked life policies, and it ties the cap to how long the customer pays premiums rather than to the product alone.
Life Insurance Commissions: Longer payment terms, higher caps
The proposal sets a sliding scale based on the premium payment term (PPT), which is the number of years over which a policyholder pays. Each band carries one cap for distribution entities and a higher one for agents, and in every band the agent’s limit works out to 1.25 times the entity’s. For policies where premiums are paid for less than five years, the proposed first-year commission is capped at 5 percent for distribution entities and 6.25 percent for agents. For a five-year payment term, the limits rise to 10 percent and 12.5 percent, respectively.
The caps climb further as the payment term lengthens. For policies with a payment term of six to eight years, the proposed limits are 14 percent for distribution entities and 17.5 percent for agents. These rise to 18 percent and 22.5 percent for nine-year payment terms, and to 20 percent and 25 percent for policies with a term of 10 years or more. All of these are first-year limits. Under the scale, a distributor selling a policy that spreads premiums over a decade or longer stands to earn several times what it would on a policy paid off in under five years.
Also Read: PB Fintech, Max Financial hit lower circuit as IRDAI proposes commission cuts; HDFC Life tanks
Life Insurance Commissions: Why the regulator wants to tilt commissions away from first-year sales
The paper links the design to policyholder behaviour. IRDAI’s stated principle is that the commission structure should encourage distributors and distribution entities to nudge policyholders to continue with multi-year payment plans instead of rewarding only the first-year payment. In practice, the tiered structure pays more where customers commit to paying for longer, which is also why renewal commissions are proposed to be lower than first-year ones.
The paper also proposes lower commissions for two categories of products: single-premium products and those that carry tax incentives. For individual savings policies with a single premium, the proposed first-year commission is 1 percent for distribution entities and 2 percent for agents. For individual pure-term policies with a single premium, the proposed limits are 7.5 percent and 10 percent, respectively.
Another proposal is that commissions should be comprehensive. According to the paper, incentives, awards, reimbursements of selling expenses and non-cash benefits should all be counted within the limit. It goes on to state that any payment made to distributors, by any name whatsoever, should come under the category of commissions. The wording appears aimed at payments that sit outside the headline commission but still reward sales.
Life Insurance Commissions: What the proposal means for term insurance
Individual pure-term insurance would follow a separate structure that depends on how the premium is paid. For a single-premium term policy, the first-year commission would be capped at 7.5 percent for distribution entities and 10 percent for agents. For a term policy with multi-year premiums, the first-year cap would be considerably higher, at 25 percent for distribution entities and 30 percent for agents, with renewal commissions proposed at 7.5 percent and 10 percent, respectively.
That makes multi-year term cover the only category in the paper where the first-year ceiling reaches 30 percent, above the 25 percent agent limit that applies to other policies with long payment terms. The gap between the first-year and renewal rates on these term policies is also among the widest in the proposal.
The paper is a consultation document, which means the limits are proposals rather than final rules. Insurers, distributors and other stakeholders can respond to it before IRDAI decides on a final framework.
