IRDAI's new reforms could lead to cheaper insurance premiums
What's the story
The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a series of reforms that could impact insurance premiums in the country. The changes are aimed at reducing distribution and operating costs for insurers, which could eventually lead to lower premiums for policyholders. However, the regulator has not explicitly said that these reforms will automatically lead to cheaper premiums.
Reform details
Reforms aimed at reducing costs
The proposed reforms include changes to insurers' Expenses of Management (EoM), commission structures, sales incentives, and disclosures. The main goal is to lower structural costs and improve value for policyholders.
An industry expert told The Economic Times that it would be premature to assume that premiums will necessarily become cheaper, while Amit Goel, Director, Equirus Raghnall Insurance Broking, said these changes could put downward pressure on premiums if lower distribution costs are passed on by insurers.
EoM reduction
Phased reduction of expenses of management limits
IRDAI has proposed a phased reduction of Expenses of Management limits.
For life insurers, the proposal is to move toward a company-level EoM cap of 12.5% of gross direct premium income (GDPI).
For general insurers, it proposes reducing this from 30% to 20% over five years.
The regulator has also suggested changes in how EoM is calculated to prevent workarounds by insurers.
Information
Increased transparency in insurance sales
The proposed reforms also seek to provide customers with more visibility into how insurance is sold and the costs involved. For instance, if a bank offers group health insurance scheme negotiated with an insurer, it would have to disclose commission it receives from the premium.
Accountability measures
Suitability requirement for large life policies
IRDAI has proposed banning volume-linked and reward-linked incentives for bank and NBFC staff selling insurance.
The consultation paper also suggests that suitability could become a formal requirement for large life insurance policies, with a documented assessment of the customer's needs.
This is part of IRDAI's efforts to hold insurers accountable if their products are unsuitable for customers.