Chennai: The much-awaited report of Insurance Regulatory and Development Authority's (IRDA) expert committee to look into the remuneration of general insurance intermediaries is out - at last.

The three-member committee under the chairmanship of A C Mukherji (the other two members are G V Rao and K N Bhandari) has come out with a customer-friendly report that will stall any rate hike due to increased costs of inter-mediation.

The committee has recommended rationalisation of commission and brokerage rates paid to the intermediaries. In addition, the report also lays down the roadmap to dismantle the administered pricing regime that makes a mockery of the supposedly free market.

The report will also gladden the hearts of individual agents, a much-neglected segment for the past two-and-a-half decades. If the committee's views are to be accepted, it will throw open the doors to the corporate sector for them. Also, the agents can breathe freely and can compete with the brokers on the basis of their professional competency as the committee has recommended scaling down of brokerage rates.

As it is true that one cannot make everybody happy all the times, the broking community will be up in arms against the committee report. For, the committee has not only recommended rationalisation of brokerage rates in case of some business lines but also wants their principal officers to be professionally qualified. The report also calls for banning composite brokers (direct and reinsurance brokers), as they will not effectively serve the customer's interest.

Nevertheless, the committee has answers to almost all the questions that has been, and will be, raised by the brokers. Similarly, the committee has raised the issue of bringing the representative / liaison / servicing offices of overseas insurers under IRDA's control. The report also favours IRDA outsourcing the activity of inspecting the insurers' books to see whether they are following the regulations laid down by the regulator.

But first let's look at the committee's customer-friendly measures that have been given a short shrift while opening up the industry.

The path towards free pricing
In a free market the administered pricing should have no place and is anti-consumer. In the case of domestic general insurance there are two kinds of policies:
(a) Tariff products (premium rates; covers are prescribed by the Tariff Advisory Committee [TAC]); and
(b) Non-tariff (the insurers are free to price their policies).

Policyholders complain that only the loss-making segments are under the non-tariff regime (an exception is motor insurance), and profitable segments (fire and engineering) are always under the tariff regime. IRDA had earlier announced that the tariff regime will be put to an end by 2005. The Mukherji Committee has laid out the roadmap for that.

As there is a need for the customers to enjoy the benefits of competition on the price points also, the committee has recommended introduction of the pure risk rate regime from 1 April 2006 onwards. As per the recommendations, TAC should announce a new set of premium rates shorn of administration, procurement and profit margins. This will be the basic premium rate and insurers are free to load it with their overheads and profit margin. The competition will then be entirely based on overheads, financial strength and the loss experience.

According to the committee, the pure risk rate regime will be there for two years (till 2008) after which the premium rates will be fully decontrolled. The proposed regime will bring back to primacy the underwriting skills though there will be a fall in premium rates in some class and increase in some other. TAC could adjust its existing rates and arrive at the pure risk rates.

Says Bhandari: "The competition will be on the cost of procurement and management without jeopardising the solvency. This is based on the Japanese system." In order to promote transparency in the sector and to keep the public informed about the financial position of the insurers, the committee has recommended publication of quarterly results in at least two dailies from fiscal 2004-05 onwards.

Similarly, the committee has asked IRDA to put a ban on brokers charging their clients for activities like risk inspection since these are part of their duty. Coming to the issue of allowing 5 per cent special discount to policyholders, the Mukherji Committee is in favour of continuing the 25-year-old practice. It was precisely for this reason that triggered the committee formation. (See: ).

But there are riders. The special discount will be allowed only on fire and engineering policies for corporates with a paid-up capital of over Rs 1 crore. Presently, insurers allow 5-per cent special discount in lieu of agents' commission on all policies issued to corporates with a paid-up capital of Rs 10 lakh or more.

The committee recommendation will surely make the agents, both individuals and corporates, happy since they are not able to sell any policy to the corporate sector now. Though in favour of linking the intermediary's remuneration to the paid-up capital of corporates, the committee has, however, suggested a revision. Instead of a single capital limit of Rs 10 lakh, the committee has classified corporates into three categories and the intermediary remuneration varies accordingly (See: Scaled compensation).

The committee's decision to rationalise the commission and brokerage rates has really come as a bolt from the blue for the agents and brokers. However, in the case of products whose price and covers are administered the present remuneration structure encourages malpractice at the marketplace by the intermediaries. Further, given the fact that insurers are operating at a cost ratio of around 30 per cent any additional cost without any value addition for them is really not advisable.

Brokers to be made professionals
Currently, licensing of brokers is based on the start-up capital and not on the basis of professional competence. The committee wants to correct this anomaly and want the existing regulations to be put in abeyance. The Mukherji Committee wants the principal officer of a broking company to have passed the associate exam of the Insurance Institute of India or equivalent exam or have at least five years of insurance work experience.

The committee has also frowned upon the practice of banks earning some money-referral fee - by giving its database to insurers. Terming the referral fee concept as wrong, the committee wants the same to be scrapped. However, in the case of rural areas, a maximum of 7.5 per cent on the actual business realised could be paid to registered groups alone and the same should form part of the insurers' management expenses.

Reinsurance scene
Looking at the reinsurance scenario the committee is of the view that the regulations are observed more in breach. According to the regulations, Indian general insurers are to reinsure their risks only with reinsurers having a credit rating of BBB from international credit rating agencies and reinsurance (facultative or treaty) to be offered overseas only after offering the same to the domestic players.

The committee recommends that facultative insurance to be offered in writing first to all domestic reinsurers and non-receipt of a reply from them within 48 hours could be taken as proof of decline and overseas placement could be done. Further, overseas facultative placement will only be allowed after IRDA is convinced that the domestic capacity has been exhausted.

On the other hand the committee is not in favour of compulsory cession of 20 per cent in favour of the General Insurance Corporation of India (GIC), the national reinsurer, and want the same to be gradually reduced to 5 per cent.

The committee has also thrown up some issues for pondering:

• Whether the insurers are remunerating the agents more than the prescribed limits by bearing the service tax burden on behalf of agents?
  
• Could the individual agents be allowed to sell only certain kinds of policies so that they are able to develop expertise in that field?

Other recommendations include:
(a) Code of conduct for brokers and insurers to be drawn up,
(b) An IRDA member (non-life) to relinquish the chairmanship of General Insurance Council to facilitate self-regulation,
(c) IRDA could outsource some of the inspection activities,
(d) Sub-brokers are not to be allowed,
(e) Liaison / representative / servicing offices of overseas insurers to come under IRDA,
(f) Insurers to device simple and similar policies for rural areas,
(g) Brokers should not charge the policyholders for any service rendered.