The Insurance Regulatory and Development Authority of India (IRDA) has directed all insurers to have a board-approved policy on commission structure for insurance agents to ensure fairness and reasonable payments.

 In the master circular on expenses of management, including commission, of insurers, 2024, the insurance regulatory said: “As the insurance agents, intermediaries or insurance intermediaries play a crucial role in the distribution of insurance products, it is essential for the insurers to have a clear and transparent board policy on their commission structure to ensure fairness, transparency, compliance, efficiency and industry reputation in the insurance distribution process.’‘

The board policy on commission structures for intermediaries should include its objectives and principles, fairness and reasonableness, good distribution practice and regular review, it said.

It should “clearly state the objectives and principles that underpin the commission structure. This should include promoting fair and transparent competition among intermediaries, aligning incentives with customer needs and encouraging efficient and cost effective distribution,’‘ the circular said.

Reasonable structure

The commission structure shall be reasonable and not result in excessive compensation for intermediaries at the expense of customers or the insurer. “Insurers shall ensure their commission structure is commensurate with the efforts required to acquire and sustain that type of business. This means intermediaries shall be compensated fairly for their work, regardless of their size or bargaining power,’‘ the regulator said.

The board policy on commission structure shall encourage good distribution practices of intermediaries. “This can help enhance customer satisfaction, build a stronger relationship with the customers, increase the insurer’s market share and ensure compliance with regulatory requirements,’‘ the circular said.

The policy should also contain a review process for the commission structure, which includes assessments of its effectiveness, efficiency, impact on premium rates, benefit pay-outs, penetration, alignment while outlining the governance and oversight mechanism for market conduct to ensure that intermediaries adhere to high standards of behavior and ethical practices.

Any new commission structure should not apply to already sold policies. “Overall, the commission structure of intermediaries should be designed to promote fair and transparent practices that protect policyholders’ interests and encourage insurance penetration,’‘ the master circular said.