Irdai scanner on car insurance policies

The insurance regulator has decided to get tough with general insurance companies to ensure car buyers get the cover they need.

It has decided to force the insurance companies to come under regulations that will make their connections with motor dealers transparent. 

The urgency shown by the Insurance Regulatory and Development Authority of India (Irdai) is in response to the finance ministry’s concern that the largest non-life insurance business in the country has got snared in mis-selling. The regulator has asked the umbrella body of these companies, the General Insurance Council, to respond to the concerns raised within this week.

At stake is the huge pay-outs or commissions insurance companies try to offer dealers to keep car buyers interested in subscribing to their policies. The commissions can often reach up to 70 per cent of the premium paid by car buyers, documents accessed by Business Standard show.

The general insurance business in India is estimated at Rs 78,000-crore ($11.44 billion) premium a year, according to IBEF data. It is growing at 17 per cent. About 47 per cent of the business comes from motor insurance and a more than a fifth of it is generated in the automobile dealers’ showrooms, an Assocham report from 2016 shows. It happens as the sales force of the dealers often get car buyers to also sign up for an insurance cover, instead of telling them it is their independent choice to select a policy or passing on the discounts on offer. 

A source in the regulator said motor car companies and their dealers “engage in mis-selling and mis-representation of insurance products in the absence of any oversight over these operations”.

The General Insurance Council did not respond to queries. 

Once car buyers buy costly insurance, they do not get any support from the insurance companies. The buyers also don’t get to meet the insurance companies’ representatives. Worse, if there is a claim, they have to depend on the dealers to decide on the amount of the pay-out.  Irdai has asked general insurance firms offering motor cover to move over to another model. 

The Indian practice is quite different from those in mature insurance markets abroad. In the UK, for instance, a car dealer has to secure a licence from the regulator, the Financial Conduct Authority. Insurance companies cannot approach a dealer directly to act as their unstated agent. In India, dealers are only supposed to provide infrastructure support to the insurance companies and also publicise their products. But they also end up as insurance agents. In the garb of making payment for infrastructure or advertising support, insurance companies give them sizable commissions to keep out competitors and retain dealers as their de facto agents. 

In 2015, the finance ministry’s Directorate General of Central Excise Intelligence had in a massive operation surveyed several dealers and almost all general insurance companies, including state-run ones. The government was concerned that service tax was not paid on the commissions and the suspected evasion ran upwards of Rs 2,000 crore.

But this time, the Irdai is trying to probe the issue deeper. It wants to end the system, which has been described as anti-consumer. Based on the recommendations made by an internal committee more than a year ago, it has suggested the industry migrate to a model like the UK one. 

Interested automobile dealers should be licensed as point-of-sale presence. The commissions would be regulated, as the Irdai would establish guidelines and also mandate punishment, including penalising “key management persons” in the insurance companies. The regulator does recognise it would not have any authority to discipline dealers.

The issue has become urgent for Irdai, as the finance ministry wants it to come up with a solution soon. This has become intertwined with the ongoing debate over the raising of third-party insurance charges, which the industry has demanded. The dues on the service tax issue are also pending and that has made the government insist that a solution to the massive mis-selling in the motor insurance sector should be ended proactively.