The Insurance Regulatory and Development Authority of India (IRDAI) has proposed a new framework to restructure the way insurance products are distributed through intermediaries. The proposed architecture would divide distributors into two broad categories — Insurance Distribution Entities (IDEs) and Insurance Distribution Persons (IDPs).
The proposed changes could alter how distributors work with insurers, the range of products they can offer and the way accountability is fixed in cases of mis-selling.
What Is an Insurance Distribution Entity?
Under the proposed framework, an Insurance Distribution Entity, or IDE, would include banks, NBFCs, insurance brokers, corporate agents, composite brokers, insurance marketing firms and web aggregators.
IDEs would be permitted to follow an open architecture, although adopting it would not be mandatory. Under this model, an IDE could distribute insurance products offered by multiple insurers.
The proposal also allows IDEs to distribute non-insurance financial products, provided they receive the required approvals under applicable financial-sector regulations. This could create an additional revenue stream for distributors and reduce their reliance on insurance commissions.
What Is an Insurance Distribution Person?
An Insurance Distribution Person, or IDP, would include individuals and employees involved in insurance distribution, such as insurance agents, insurance associates and Point of Sales Persons (PoSPs).
IDPs working for insurers would continue to operate under a closed architecture. However, an IDP could represent one life insurer, one general insurer, one health insurer and one insurer from each of the other mono-line segments, as long as the products being offered do not compete with one another.
For example, an IDP would not be permitted to sell competing health insurance products from both a general insurer and a standalone health insurer. PoSPs would also not be allowed to work with multiple IDEs.
New Opportunities for Hospitals and Auto Garages
The proposed framework could also expand the range of entities participating in insurance distribution.
Hospitals could distribute health insurance products after registering as IDEs, subject to the required safeguards. Similarly, non-dealer automobile garages involved in repair services could sell motor insurance products by becoming associates of an insurer.
The proposal also includes provisions for Market Infrastructure Institutions (MIIs), with scope for insurers to establish additional MIIs.
Stricter Accountability for Insurance Mis-Selling
IRDAI has proposed stronger measures to improve accountability in cases of mis-selling. The functional identity of specified persons, salespersons and PoSPs, along with agents and associates, could be linked to the insurance policies they sell. Details related to mis-selling may also be made available through the Public Insurance Registry.
Mis-selling could include presenting an insurance policy as a fixed deposit or a high-return investment, describing a regular-premium policy as a single-premium product, or failing to properly explain surrender values and the impact of stopping premium payments.
The proposal also states that simply obtaining a customer’s signature or consent would not by itself protect an insurer or intermediary if an unsuitable product was sold.
IRDAI has further proposed including both monetary and non-monetary incentives within the definition of commission. Volume-based or reward-linked incentives for employees of banks and NBFCs involved in selling insurance could also be prohibited.
What the Proposed Changes Mean for Customers
For consumers, the proposed changes go beyond determining who can sell insurance. The framework would also influence how distributors are organised, which products they can offer and whether they can represent competing insurers.
However, the proposed framework is still under consultation and has not yet been finalised. Its actual impact on insurers, distributors and customers will depend on the final regulations issued after the consultation process.
Disclaimer
This article is based on the proposed IRDAI framework and is intended for general information only. The provisions discussed are not final and may change following consultation and the issuance of the final regulations. Readers should refer to official IRDAI notifications and regulations for the latest information.