IRDAI changes to insurance commissions norms is impacting the operating margins of automotive dealerships due to delay in payouts by the companies.
09 Jul 2023 | 15611 Views | By Amit Vijay M
Auto Dealers facing multiple challenges from the overall demand slowdown have to also negotiate changes in IRDAI norms impacting existing commission structures creating greater pressure on their bottom lines.
At the recently concluded second FADA summit on Banking and Insurance in Mumbai,representatives of several automotive dealerships told Autocar Professional ...
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Auto Dealers facing multiple challenges from the overall demand slowdown have to also negotiate changes in IRDAI norms impacting existing commission structures creating greater pressure on their bottom lines.
At the recently concluded second FADA summit on Banking and Insurance in Mumbai,representatives of several automotive dealerships told Autocar Professional that even as dealer representatives are in the process of discussions with stakeholders on the revised commissions post changes, insurance firms have held back close to Rs 1,500 crore on commissions since the new regulations have set in.
Understanding the pending dues issue
The summary of these pending arises from the insurance companies’ ambitions to collect higher premiums from dealerships that have significant business potential and offer a higher commission than what's mandated by IRDAI as extra incentives.
As per the IRDAI circular on Motor Insurance Service Providers (MISP) dated November 1, 2017 states: "An insurance intermediary based on objective and transparent criteria can enter into service level agreements with general insurers for selling motor insurance policies."
As per the IRDAI norms, the maximum 17.5 percent commissions could be paid by the insurance company through the Motor Insurance Service Providers (read broking houses) or an 18.5 percent commission if the business was done directly with the insurance company, dealers stated.
Sai Girdhar, Secretary of FADA who is also a Skoda and Volvo dealer from Rajasthan confirmed this and added that the additional commission made by insurance companies to dealerships was for gaining additional business from dealers.
On disbursement of the higher incentives, Girdhar said: “The incentive or bonus from additional business generated was paid and routed through its direct selling agent or another company showing it as an expense in the insurance company books.”
But when the government agencies got a whiff of this indirect routing, both GST and income tax authorities got into litigation with the insurance companies. H.O.Suri, Managing Director, IFFCO Tokio Insurance told Autocar Professional that the insurance industry is facing multiple regulatory issues.
Commenting on the dealer's pending commissions, Suri said: "The insurance industry is facing multiple challenges from various fronts. Industry participants have agreed in principle that by the end of this month or early next month, we will decide on the future commission's payout and also clear the pending
dues of the dealers.”
Insurance companies soaked up liabilities worth Rs 6,500 crore
Explaining the change in norms Suri said under the new IRDAI rules companies cannot spend more than Rs 30 to canvass for premiums worth Rs 100, and should they collect Rs 70 as a premium, the highest expense they can incur is Rs 21.
More than 30 insurance companies are facing a combined liability of Rs 6,000-Rs 6,500 crore of which Rs 5,000 crore is due to the government and Rs 1,500 crore to the auto dealers. On the issue of pending insurance dues, FADA President Manish Raj Singhania says that insurance firms have held up our payouts in excess of 60-90 days "We are hopeful of resolving the issue in the next 10-15 days," he indicated.
Reducing margins from insurance commissions
Singhania admitted that dealer margins will be further crunched with the new norms setting in, adding to the squeeze in earnings. A Delhi-based dealer said, "We are still in the dark as OEMs and insurance companies who control the insurance payouts would want to retain a chunk of the 30 percent expenses and reduce the outgo to the dealership. Talks are on at the moment with the insurance companies and the dealer community which rakes in business should win and get the largest slice."