The Hindu Business Line : IRDA restores 5 pc special discount, tags riders

THE Insurance Regulatory and Development Authority (IRDA) has reinstated the five per cent special discount which it had discontinued in July last year.

However, the regulator has introduced the discount with rigorous restrictions. The discount would be available only for companies with a paid-up capital of above Rs 3 crore, without any distinction between private and public sector entities.

The regulator's notification clearly indicates that the discount could be extended by the insurers in lieu of agency commission or brokerage. It cannot be clubbed along with either of these elements. This special discount would be available only for tariff-driven business, according to the notification.

The notification, the sources said, was to correct some anomalies like clubbing the brokerage and the special discount while quoting some of the tariff in pitching for business by some of the private sector insurers. Besides, many of the private sector insurers had also offered the brokerage or the agency commission along with the special discounts to undercut the public sector to secure high value business. By loading both brokerage and special discounts, the effective discounts available were 17.5 per cent.

Since none of the public sector companies were in a position to load these elements for discounting premia, they were at a disadvantage against the private sector. In some cases, this kind of discounting had also led to a fall in effective premium, particularly when the world over the premia are on the rise and when reinsurers are pushing for an increase in rates based on escalation in the probable maximum loss ratios.

The sources said that premiums in India were already among the lowest in the world and further undercutting would have a damaging impact on the insurance company's solvency.

This notification also implied that if the brokerage or corporate agents wished to offer discounts, they would have to do so from their own agency commissions, the sources said.

The regulator has also revised these commissions. For corporates up to a paid-up capital of Rs 3 crore, the agency commission has been fixed at 10 per cent and the brokerage at 12.5 per cent. For corporates with a paid-up capital in excess of Rs 25 crore, the agency commission/brokerage has been fixed 6.25 per cent and 7.5 per cent respectively.

The sources said that this also implied that corporates falling below this Rs 3 crore capitalisation limit would have to go through the brokerages or insurance agents for placing their business.

This would mean that the brokers would have to focus only on business in the small and medium sector, where insurance penetration is still very low. Sources said that the purpose of widening the intermediaries in the insurance business was to improve the penetration and bring it up to at least 5 per cent of the gross domestic product, rather than undercutting existing business. Currently, the ratio is less than 2 per cent of the GDP.

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