Insurance Agent Commission: IRDAI's Rules

How the Commission Rules Changed

Key Terms in the 2024 Regulations

Commission

Any compensation, including remuneration or reward by whatever name called, paid by an insurer to an insurance agent, intermediary or insurance intermediary for soliciting, procuring or transacting insurance business. Rewards are inside this definition, not a separate head.

Expenses of management

Operating expenses, plus commission to agents and intermediaries, plus commission and expenses on reinsurance inward charged to the Revenue Account. Commission is one of the three parts.

Commission limit (Reg 12)

Total commission on life insurance products, including health products of life insurers, must not exceed the EoM limits in the regulations. The same rule applies to general and standalone health insurers.

What the Board's Commission Policy Must Cover

Regulation 4 requires a written, Board-approved policy for payment of commission. It may be folded into the EoM policy and must be reviewed periodically. At a minimum it must:

• check_circleSet out the structure of commission payable.
• check_circleBe in the interest of policyholders.
• check_circleIncrease insurance penetration and density in the country.
• check_circleBe commensurate with the nature and tenure of the policy.
• check_circleProtect the interest of agents and intermediaries and enhance their performance.
• check_circleBe commensurate with the insurer's business strategy.
• check_circleBe simple to administer and cost effective.

IRDAI's Guidance Note on the Policy (Master Circular, 2024)

• check_circleFairness: commission must not mean excessive pay for intermediaries at the expense of customers or the insurer, and should match the effort needed to acquire and keep that type of business, whatever the intermediary's size or bargaining power.
• check_circleConflicts of interest: the policy must address the risk of intermediaries recommending products that are not in the customer's best interest to earn higher commission.
• check_circleReview: the Audit Committee reviews the commission structure at least once a year, looking at its effect on premium rates, benefit payouts, penetration and customer needs.
• check_circleReporting: regular reports to the Board and senior management on how the commission structure performs and complies.
• check_circleNo retrospective change: a new commission structure does not apply to policies already sold.

The Old 2016 Life Commission Caps (No Longer in Force)

For reference only. These maximums applied from 1 April 2017 until the 2023 regulations repealed them. Older study material and question banks may still quote them.

How Commission Is Accounted For

• check_circleCommission is part of acquisition cost. Under IRDAI's financial statement regulations, acquisition costs are expensed in the period they are incurred, not spread over the policy term.
• check_circleIn the EoM test, a life insurer's actual EoM is commission plus reinsurance inward commission and expenses plus operating expenses, and that total is compared with the allowable amount (Reg 7). Because commission is inside the cap, a higher commission leaves less room for operating costs.
• check_circleLife insurers test participating and non-participating (including linked) business separately. Any excess EoM is charged to the shareholders' Profit and Loss Account.
• check_circleEvery insurer files a Board-approved return on payment of commission with IRDAI within 45 days of the end of each financial year, after the Audit Committee reviews it (Reg 14).

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