Published in Mint on 19th September, 2017.
Some months back, Mint Money published a story on why one shouldn’t settle for a car insurance policy that the car dealer packages with a car purchase. We advised shopping around for a cheaper policy instead of settling for this convenience. You can read it here.
The good news is that from now on, your car dealer may actually be offering better options. As per the guidelines on motor insurance service providers, which were issued on 31 August by the Insurance Regulatory and Development Authority of India (Irdai), motor dealers can now work for one or more insurers either directly or through insurance intermediaries. Dealers that work for multiple insurers will have to offer policies of different insurers and premiums. The new guidelines come into effect from November this year.
But before we get into the details of how this will work, let’s understand the problem at hand.
Why dealer policy is expensive
For the insurer, a car dealer is a point of sale and best placed to sell car insurance. This is why often insurers pay car dealers for sales, even when they are not licensed insurance distributors. These costs get accounted under heads such as infrastructure and marketing expenses. Further, it is also known in the industry that car manufacturers have tie-ups with insurers and dictate the premiums and pay-outs to dealers. For you, this may mean a higher premium. “About 40% of general insurance is motor insurance business and a large part of this is sourced through motor dealers. Since dealers are the first point of contact with the customer, some insurers have been known to pay incentives of up to 50% to push their product. Regulations don’t allow this,” said Abhishek Bondia, managing director and principal officer, SecureNow Insurance Broker Pvt. Ltd. “This gets passed on to customers as higher premium,” he added.
Irdai took cognizance of the market practice in 2015 when it constituted a committee on motor dealer payouts to study the practice of pay-outs to dealers, among other things. The idea was to examine deviations from regulatory rules and bring transparency in payouts. The report was submitted last year. The guidelines recognise the importance of car dealers as points of sale for motor insurance and the need for regulatory oversight over their activities as insurance distributors by defining their role, license requirements and incentive structure.
As per the new guidelines—which come into effect from November this year—any automobile dealer can become a distributor for motor insurance as long as it is sponsored by an insurer or a licenced insurance intermediary like a broker or a corporate agent. These motor insurance service providers (MISPs) can work with one or more insurers, but if they are being sponsored by an intermediary, then they can only sell policies of insurers with whom the intermediary has a tie-up. All employees of MISP-selling insurance should have passed at least Class 12 and need to undergo training and examination of a point of sales person (PoSP). The guidelines also specify that MISP will not solicit motor insurance business from people who didn’t buy automobile from the MISP. In terms of remuneration, a MISP can be offered incentives from the insurer or the intermediary it has tie-ups with. But the maximum allowed is 19.5% of the own-damage portion of the car insurance premium. “The overall cap of 19.5% includes commission of 15% and a reward of 30% of the commissions. For intermediaries, rewards are linked to customer service standards, but for motor dealers, the guidelines don’t have the same requirements. This creates an anomaly,” added Bondia.
The guidelines further specify that MISPs will not be allowed anything over and above the incentives, whether it comes in the form of fees, charges, infrastructure expenses, advertising expenses, documentation charges, legal fees, advisory fees, or any other payment. “Earlier, the regulations had not specified the guiding principles for auto dealers, but now even the payment structure is clearly spelt out and penalty on violation will be stringent,” said Sharad Mathur, head, sales and distribution, SBI General Insurance Co. Ltd. “So far, dealers have been deprived of regulatory status. The price of motor insurance was fixed to a large extent in the auto dealer space and the dealers had to sell the policy of select panel insurers. Now, given that dealers or intermediaries can have multiple tie-ups, insurers will be encouraged to do risk-based pricing that is more customer-centric,” added Mathur.
Balachander Sekhar, chief executive officer, RenewBuy.com, said the guidelines will create a level playing field. “This is a step in the right direction; now anyone selling motor vehicle insurance, including auto dealers, will need to be licensed and remunerated as per directions. This will lead to more transparency in product and pricing, and add choice for consumers,” he said.
What will this mean for customers? “The fact that the commissions are capped definitely means better pricing for customers. However, motor dealers can still go with a single insurer tie-up; so it’s always a good idea to compare premiums and then buy a policy,” said Bondia.
You can go online, look up rates and buy motor insurance yourself by giving your details and those of the car (such as chassis number and engine number, which are available in the purchase invoice). The policy will be emailed to you, and you need to send a copy to the car dealer, who will then get the car registered.