IRDAI proposes to make insurance distribution transparent seeks to protect policyholders

The Insurance Regulatory and Development Authority of India IRDAI has proposed a major overhaul in distribution to make insurance distribution more transparent and improve value for policyholdersIRDAI has issued a consultation paper on Recalibrating Economics of Insurance Distribution mapping out a comprehensive framework of reforms covering insurance distribution its structure expenses commissions market conduct transparency and leveraging digital infrastructureThe insurance sector regulator said the primary aim is to foster a customercentric competitive efficient and transparent distribution ecosystem while enabling better and sustainable outcomes for policyholders insurers and distributorsGreater transparency in product information remuneration and distribution practices along with appropriate safeguards against misselling and unfair practices will give much greater confidence to customers it saidStronger safeguards against misselling and bundling of productsIt also proposed stronger safeguards against misselling including making suitability an enforceable obligation documenting customer needs and suitability for specified life insurance sales and maintaining an audit trailThe reforms also seek to strengthen safeguards against compulsory bundling of insurance with other financial products and services and address misselling through greater accountabilityThis includes documenting customer needs and suitability explicitly including all forms of remuneration direct or indirect monetary or nonmonetary within the definition of commission for regulatory purposes and prohibiting volumelinked or rewardlinked incentives for bank and NBFC staff selling insurance it saidThe proposals also include linking the identity of the individual with the policy sold placing information on misselling incidents in the public domain and providing for commission clawback in cases of missellingInsurers and distributors need to disclose commission policiesInsurers and large distribution entities would be required to disclose commission policies and structures in a simple and accessible manner while specified commercial policies would carry commission disclosures it said in a statementThis would enable customers in being aware of the distribution costs built into the pricing it addedTransparency around who is selling the policyIt seeks to replace the existing complex and fragmented architecture with three broad categories of distribution entities namely Insurance Distribution Entities IDEs Insurance Distribution Persons IDPs and Market Infrastructure Institutions MIIsA clearer distinction between open and closed distribution architectures would promote competition and reduce regulatory arbitrage and operational constraints it saidThe regulator said the reforms are intended to simplify the distribution architecture making it more customer facing where customers easily understand who they are buying the policy through it saidExpense of management framework to be recalibratedIRDAI has also proposed changes to the Expense of Management framework to reduce distribution costs and support affordabilityExpense of Management EoM framework is proposed to be recalibrated through lower limits with a phased glide path it saidThe proposed reduction in EoM is intended to lower the overall cost of insurance thereby expanding the risk pool available in general insurance and enhancing returns to policyholders in life savings products The phased approach seeks to balance improved value and affordability for policyholders with the financial sustainability of insurers while progressively improving cost efficiency across the sector it addedDigital optionsIRDAI is also looking at strengthening the digital infrastructure and said digital and technologyenabled channels will improve ease of purchase and servicing expand consumer choice and facilitate wider access toinsurance including among currently underserved segmentsMarket Infrastructure Institutions MIIs for insurance as digital pullbased alternatives for insurance distribution with Bima Sugam identified as one such infrastructure it saidIt also proposes to leverage the Public Insurance Registry PIR to support transparency comparison portability and operational efficiency