Insurance sector has been under the scrutiny of government agencies for some time now. First the GST authorities raised a huge demand running into tens of thousands of crores. Then the IT department scrutinized various transactions to verify tax evasion.
The IT department suspects insurers of using multiple companies as hundreds of bank accounts to pass on higher commissions to their agents to hide the money trail. A recent report talked about notices under Benami transactions (Prohibition) Amendment Act, 2016, will be sent to agents.
Insurance is a highly competitive sector and the market is huge. The increasing number of companies and their desire to grow has resulted in the use of unfair means to secure business. And therein lies the problem.
To ensure sustainability of the companies, the regulator devised two in respect of business procurement as well as overall expenses of management. This was to ensure that companies had sufficient funds to take care of claims and requirements of policy and other stakeholders. Lower expenses would have resulted in the companies having sufficient funds which could have been utilised for giving lower rates to the policyholders or giving better returns to the shareholders. But this was not to be.
Innovative methods to fund intermediaries
In their desire to grow fast and also to cherry-pick profitable businesses, companies started finding ways of paying additional amounts to marketing intermediaries. This meant violating the regulations dealing with payment of commissions and fees to business procurers. Once started, there was no way of keeping a check. The methods to fund acquisitions became quite innovative.
While there were perhaps intermediaries which brought in business, due to their efforts and service, there were also many of them who parted with portions of their commissions and fees with the customers.
Prior to opening up of the market in 2000, in the general insurance business, for mandatory insurances or depending on the size of the organisation paying the premium, the commission amount was paid as a discount to the organisations. So, the organisations benefited. Almost 80 to 85 per cent of the business came under this category. Only about 15- 20 per cent were handled by intermediaries and they received commission for their efforts. These were mostly small retail businesses where there was effort required to go out and convince individuals to go in for insurance.
Post-2000, when the insurance sector was opened up, new regulations came up, all types of businesses to be procured through intermediatries. Suddenly there was an explosion in the amounts which were paid for business procurement. It was perhaps natural for temptations and greed to come to the fore. As new players kept entering the sector, the need for more and more business came into play. While the sector also increased in size, a good portion of the business which was being done by the existing companies was taken away from them. With many competing companies, each with a desire to grow fast, paid higher procurement costs over and above what was permitted as per regulations.
It is these additional amounts that are the subject matter of scrutiny. Demands have been raised running into thousands of crores. And already many companies have paid up substantial amounts. Of course, many of them would argue for relief. It would be interesting to watch the developments and see how it all finally ends.
Expense on management capped
In the meantime, the regulator has decided to do away with the regulation for capping the maximum amount payable to intermediaries for business procurement. It has declared that there will beonly a single expenses of management limit kept at 30 per cent of the total volume of business. Companies are free to devise their own policies with regard to payment for getting business. This airms to free insurance companies from having any issues in this regard, with tax authorities or enforcement agencies in future. But they would have to continue to deal with what has happened in the past
