The Hindu Business Line : Re-fixing of commissions

THE notification issued last month by the Insurance Regulatory and Development Authority (IRDA), banning all Government and public sector business to brokers and re-fixing the brokerage allowable for tariff lines, has created a good deal of consternation among the brokers.

The notification gives a choice to the insurance company to either give the customer a five per cent discount on premium, or pay the broker the brokerage — for tariff lines. Now, which customer would want to forgo the discount? Therefore, the notification practically shuts off the tariff lines of business to the brokers.

IRDA has also changed the brokerage rates. Earlier, insurance companies were to pay a brokerage of 12.5 per cent of the premium that the brokers brought in. Now, the rate depends upon the size of the insured (customer) — 12.5 per cent is allowed for customers who are companies with a paid up capital of less than Rs 1 crore. For companies with a paid-up capital between Rs 1 crore and Rs 25 crore, the rate is fixed as 7.5 per cent. For above Rs 25 crore, it is 5 per cent.

The brokers are up in arms. The Brokers Association in Mumbai has said that it has "taken up the matter with IRDA". The brokers see this as a major blow, just when they are about to start the business. (IRDA has issued licences to 44 brokers since February).

One broking firm in Chennai said that it was "unfair" to have brought in this regulation now. After all, the statutory minimum capital requirement for a broking firm is Rs 50 lakh. Some brokers are taking the line, "if you had told us this earlier, we would not have entered this business at all".

"We are all shell-shocked," says Mr T. Narayana Rao of TTK Insurance Services Pvt Ltd. As composite brokers (both insurance and reinsurance), the company has been set up with a paid-up capital of Rs 2 crore. "With fire and engineering (the main tariff portfolios) taken away, there is not much left," Mr Rao told Business Line.

But what is IRDA's idea behind this notification? Industry sources say that the Authority has a number of reasons, not in the least the one that has been stated in the notification itself — to bring down the intermediation costs. Besides, the Authority appears of the view that there is not much value-addition that the brokers can bring to the table in the tariff lines of business. By this notification, IRDA is crowding the brokers out of the traditional areas and asking them to operate in non-tariff areas where there is more scope for innovation.

Also, IRDA is said to be annoyed at the conduct of some brokers, who tried to pass on a part of their brokerage to the customers (which is illegal). So the rationale behind the notification is, "well, if you do not need so much brokerage, we will reduce the rates".

However, many disagree with IRDA. Mr R. Thyagarajan, Chairman of the Shriram group (which has a broking firm), feels that at this stage of the industry, trying to bring down intermediation costs would be counter- productive.

The argument goes like this: after all, insurance is never bought, it is always sold. The Indian industry is yet to appreciate the full value of insurance. Therefore, intermediaries such as brokers would need to spend on making the customers appreciate the value of insurance. To do this, they may need to go through another level of intermediaries, say, people who have some influence over the customers. These second level intermediaries would also probably need to be paid. All these cost money. Hence, to clamp down on intermediation costs may not help in reaching the goal of deepening the insurance market.

Mr N. Raveendran, Director, Alegion Insurance Services Ltd, says, "for earning a premium of Rs 300, we have to go to the customer half a dozen times. Unless, we are remunerated adequately, it is very difficult to survive." Mr Narayana Rao said he failed to understand the logic behind linking the brokerage rates to the paid-up capital of customer-companies. After all, the risk is not linked to the paid-up capital!

There is yet another interesting angle to this. Asked if this notification would deal such a staggering blow to the nascent broking industry, many brokers privately said it would not.

This is because, notification or no notification, business goes on as usual.

"What this (notification) will do is to create a lot of paperwork and fiction," one broker said. Inasmuch as the insurance companies need brokers to fetch business, they will have to pay what the brokers demand. There is an economic value to the broking service, and that value will have to be paid for.

So the insurers will find some way of paying the brokers. But for statutory compliance, they will be obliged to produce a lot of papers supporting the false transactions.

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