Cap on dealer commissions unlikely to lead to change in premiums

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With the Insurance and Regulatory Authority of India (Irdai) capping payments by insurance companies to auto dealers, general insurers might move towards risk-based pricing, say industry players. But, premiums may not be impacted by much. 

Guidelines on motor insurance service providers had brought auto dealers under their purview as motor insurance service providers (MISP) and had capped distribution fees payable to them at 22.5 per cent for two-wheelers and 19.5 per cent for four-wheelers and sports utility vehicles (SUVs). Earlier, insurance companies used to pay this distribution fees in the range of 25-30 per cent, across the segment. But, premiums are not to going to change despite the fall in distribution fees by insurance companies, believes industry officials.

“If we talk in terms of premiums, it is likely that industry might move towards risk-based pricing. Until now, premiums were largely formula-based across the country, but now we might witness premiums going down in the region where loss ratio is less or customers who drive safely; while there might be some increase in places where loss ratios are higher,” said Sharad Mathur, head of sales and distribution at SBI General Insurance. This commission structure is applicable only on premium charged towards “own damage”. Premiums of comprehensive motor insurance policies has two components — third party and own damage. 

Now, with the change in the norms, MISPs offer a choice of different insurance companies and inform policyholders of the premium rates of each insurer. MISPs can now tie up with any number of insurance companies, which was not the case earlier.

“With MISP in force for almost a month now, it helped automobile dealers to become part of the regulatory framework and lots of transparency has come in the entire approach to distribute motor insurance through this channel. Insurance companies as well will have a fair and transparent system and uniformity in the whole process,” Mathur said.

Also, these dealers can provide after-sales services such as modification, cancellation, renewal and claims servicing of motor insurance policies for which they can charge a fee. So far, many automobile dealers have been selling motor insurance policies either through third-party brokers or by floating an insurance broking company. But now, MISPs can be appointed by the insurer or the insurance intermediary to distribute and/or service motor insurance policies of automotive vehicles sold through it, Irdai said. The insurance industry also believes that, with the capping of distribution fees, costs of insurance companies might come down, going forward. 

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