Why are motor insurance commissions so high? IRDAI wants changes

Buying motor insurance may be a routine part of getting a new vehicle, but the Insurance Regulatory and Development Authority of India (IRDAI) has flagged an issue customers may not always see — high commissions on products that often require little effort to sell.

In its public consultation paper, ‘Recalibrating Economics of Insurance Distribution’, the regulator has proposed several measures to streamline motor insurance, encourage digital purchases and give customers more choice.

IRDAI said motor insurance is a “prime example of lack of transparency driving high commissions”, even though some products are simple and third-party insurance is mandatory.MOTOR INSURANCE COMMISSIONS AS HIGH AS 50%

According to the consultation paper, the average commission rate on motor insurance is 24%, with rates ranging from 13% to 50%.

Original Equipment Manufacturers (OEM) brokers and Motor Insurance Service Providers (MISPs) account for a 30% market share across new and old vehicles. They receive an average commission of 24%, with the maximum going up to 31%.

During FY25, OEM brokers and MISPs generated total premiums of Rs 29,000 crore and were paid nearly Rs 7,050 crore in commissions.

IRDAI said customers often remain unaware of these high commission rates.OLD VEHICLE INSURANCE ALSO UNDER THE SCANNER

The regulator has also raised concerns over commissions on insurance for old vehicles.

A large number of motor dealers have attached garages for servicing and repairs. Selling motor insurance to these customers is therefore unlikely to require a high level of effort, IRDAI said.

Despite this, MISPs receive an average commission of 12% on such insurance.

Banks and non-banking financial companies (NBFCs) that finance vehicle purchases have also been flagged. According to IRDAI, banks and NBFCs that insist on compulsory bundling of loans and insurance continue to receive 16% commission, while borrowers remain unaware.IRDAI FLAGS PRICING AND COMPETITION CONCERNS

The regulator has also raised concerns about certain OEM-linked brokers that sponsor MISPs.

IRDAI said there are concerns that such brokers influence insurers against offering lower prices through other distribution channels.

“Such practices, where they occur, can restrict price competition across channels and result in higher premiums for policyholders, and are therefore contrary to policyholder interests,” the regulator said.

It also pointed out that remuneration linked to long-term motor insurance policies is not always in line with the nature and extent of services provided by MISPs.

Sponsoring brokers, which are responsible for overseeing their MISPs, have “been found many times wanting” in ensuring that distribution arrangements and practices promote competition and protect policyholder interests, IRDAI said.MOTOR INSURANCE MAY GET A DIGITAL PUSH

One of the key proposals is to encourage customers to buy motor insurance digitally.

IRDAI has proposed making motor insurance products for both new and old vehicles available on Motor Insurance Information, or MII, platforms such as Bima Sugam.

These not-for-profit platforms, set up by all or a group of insurers, should not charge more than 5% of the premium to recover platform costs, according to the proposal.MORE CHOICE WHEN BUYING INSURANCE

IRDAI has also proposed changes for motor dealers selling insurance.

Motor dealers that meet the structure of an Insurance Distribution Entity (IDE) would have to register as an IDE if they want to sell insurance products. Such an IDE broker would be able to sell products of multiple insurers.

Other MISP motor dealers that do not meet the IDE structure, such as proprietorships or unregistered partnerships, would have to either tie up as Point of Sales Persons (PoSPs) of an IDE or become an associate of a single insurer.

A PoSP could sell products of all insurers with which the IDE has a tie-up, while an associate could sell products only of the insurer with which it has a tie-up.

IRDAI has proposed specific regulatory obligations for motor dealer IDEs and PoSPs to ensure that customers buying new vehicles have a choice and can make an informed decision.advertisementDEALERS MUST SHOW CUSTOMERS OTHER OPTIONSUnder the proposed rules, motor dealers would have to prominently display the option of buying motor insurance through an MII platform, including a QR code to access it.

They would also have to make new-vehicle customers aware of the MII option.

The customer's mobile number would have to be shared with the Public Insurance Registry (PIR). This should be the same number given to transport authorities for vehicle registration.

The PIR would then validate the number with the vehicle registration system, VAHAN. It would also send a post-event direct message to the customer to check whether the required obligations were fulfilled.DEALERS CANNOT DENY CASHLESS REPAIR SERVICE

IRDAI has proposed specific market conduct requirements for motor dealer IDEs and PoSPs.

A dealer should not deny cashless repair service to a customer simply because the insurance policy was not purchased from that dealer.

The regulator has also proposed that dealers should not enter into agreements with OEMs or IDEs that are against the interests of policyholders.

These include service-level agreements and performance-linked incentive plans from OEMs that reward motor dealers for selling insurance policies.

IRDAI has also proposed that mandatory third-party insurance and easy-to-sell motor insurance for new vehicles should carry “much lower commissions”.

The broader objective of the proposed measures is to improve transparency, give customers more choice and ensure that commissions are better aligned with the effort involved in selling motor insurance.- Ends