Background
Automobile sector in India has been growing at a rapid pace, contributing to over 7% of India’s total Gross Domestic Product[1]. With annual sales exceeding 20 million passenger vehicles the mandatory vehicle insurance requirement has led to a commensurate increase in motor insurance business sales. This sector now constitutes 45% of the overall business of general insurance in India.[2]
Automobile dealers are the primary touch points for customers while buying motor insurance products in the market. Prior to 2017, such dealers used to tie-up with insurers, brokers or agents to source motor insurance. In 2017, the Insurance Regulatory and Development Authority of India (“IRDAI”) framed Guidelines on Motor Insurance Service Provider, 2017 (“MISP Guidelines”), following the report of a committee set up to review payouts to automobile dealers. The guidelines regulated the distribution of motor insurance business by automobile dealers.
The recent years have witnessed an increase in the instances of Motor Insurance Service Providers (“MISPs”) forcing prospective customers to buy specific policies at specific prices. In fact, a refusal to buy insurance from such MISP, while within the customer’s rights, could lead to an outright denial of the automobile sale. In response to the complaints relating to the above practice, the Road and Transport Authority (RTA) has also issued warnings to automobile dealers.[3]
Similarly, the IRDAI has strongly objected to the indirect exploitation practiced by MISPs and associated brokers, wherein a customer’s refusal to buy a policy from them is met with the threat of denial of the cashless claim facility. In a case against Maruti Insurance Broking ltd. (“MIBL”), the IRDAI, found denying cashless claims to policyholders, who did not buy insurance from MIBL-sponsored MISPs, discriminatory and in violation of the code of conduct prescribed under the MISP Guidelines.[4] The IRDAI also observed that the MISP sponsored by MIBL violated guidelines by conducting business in a manner that was prejudicial to the interests of the policyholder and manipulated the insurance business. The IRDAI imposed a penalty of INR 3 crore on MIBL for the violation of the MISP guidelines.
MISPs associated with an insurer or insurance intermediary stand to gain handsomely by selling motor insurance policies to directly to the customers. This is because the margin earned is almost equal to or more than the margin involved in the sale of an automobile. The IRDAI allows insurance companies to pay around 19-22% of total premium as commission to MISPs[5], whereas automobile dealers earn around 4-7% profits from the sale of vehicles.[6] These dealers find the commissions earned from the sale of vehicles to be at par with those earned from the sale of insurance policy. For automobile dealers functioning as MISPs, motor insurance may become one of the primary products instead of an ancillary risk-hedging instrument while undertaking their usual business of automobile sales.
The IRDAI had set up a committee for review of MISP Guidelines in 2019. The Committee for Review of MISP Guidelines submitted its report in January 2021 (“Committee Report, 2021”). The Committee Report, 2021 acknowledged the issue of MISPs looking to solicit only select policies from a limited number of insurance companies limiting the choice provided to the customer. The Committee Report, 2021, while highlighting the practices reported in onsite inspection reports pertaining to MISPs, observed that “MISP has failed to offer a choice of motor insurance policies of different insurers to the prospect”.
MISP Guidelines
Motor Insurance Service Provider is defined under the MISP Guidelines as an automobile dealer appointed by an insurer or an insurance intermediary to distribute and/ or service motor insurance policies of automobiles sold through it. Under the MISP Guidelines, any automobile dealer is eligible to become a MISP for distribution and servicing of motor insurance policies including add-ons.
The IRDAI has also laid down a code of conduct to be followed by MISPs (“Code of Conduct”) under the MISP Guidelines in Chapter III. Further, the IRDAI has reserved the power to cancel the appointment of a MISP in an instance of violation of the Code of Conduct. Under the Code of Conduct, an obligation has been casted upon the MISP to offer a choice of motor insurance policies of different insurer(s) to the customer. Further, the Code of Conduct also provides that an MISP shall not: (a) force the prospect/ policyholder to necessarily buy motor insurance policy through a particular insurance intermediary or insurer, (b) deny the customer his rights and options to seek motor insurance policy or renewal of motor insurance policy from any insurer or insurance intermediary, (c) direct or indirect imposition of risk selection by insurers or curtailment of choice of the prospect/ policyholder, and (d) solicit motor insurance business from those customers who have not purchased vehicles from the respective MISP.
Therefore, actions of MISPs prevalent in the industry are in direct violation of the multiple stipulations under the Code of Conduct. However, the customers are left remediless in the absence of an effective grievance redressal mechanism.
Further, MISPs are not categorised as ‘insurance intermediaries’ under the IRDAI Act, 1999. It hinders effective regulatory oversight by the IRDAI, which it exercises for other intermediaries. Non-recognition as an insurance intermediary means that MISPs are neither required to register with the IRDAI nor renew their registration in terms of Section 42D of the Insurance Act, 1938.
The Way Forward
The following can be considered by the IRDAI and the insurance industry as possible solutions:
- MISP to be brought under regulatory purview of IRDAI: Under the MISP Guidelines, there is no provision empowering the IRDAI to impose penalties against automobile dealers operating as MISPs. IRDAI may impose penalties on insurers or intermediaries if any malpractice associated with their MISPs surface. However, the only recourse available to IRDAI against MISPs is to cancel their appointment directly. Since MISPs are similar to other insurance intermediaries and perform comparable functions, the IRDAI will be able to directly address the issue of policyholder exploitation by putting them under regulatory supervision by notifying them as intermediaries.
- Necessary safeguards to be available for policyholder/customers of motor insurance: The IRDAI, in consultation with insurers, can help set up a specific grievance redressal unit/helpdesk for complaints by customers while dealing with MISPs. Violations by MISPs should then be recorded and followed up by the actions that may be taken by the IRDAI either during renewal or ad-hoc.
- Adoption of suggestions of the Committee Report, 2021: The Committee Report, 2021 suggested institutionalisation of MISPs under IRDAI intermediary framework by providing two alternatives:
- First, the MISPs can be transitioned into a distribution channel for soliciting motor insurance business, subject to certain conditions such as agreements with insurers, prohibition to collect premiums, and access made available to customers for online payment to insurers. For incorporating this structure under the current IRDAI framework, the authority will need to introduce regulations for governing MISPs similar to regulations for corporate agents, brokers, etc.
- Second, MISPs can be transitioned to become a sub-broker or a sub-agent and work for a broker or a corporate agent, subject to regulatory requirements such as registration requirements, code of conduct, and use of technology for oversight and monitoring of MISPs. These options can be made available to automobile dealers acting as MISPs along with other regulatory requirements if suggestions of the Committee Report, 2021 are accepted by IRDAI. However, the viability of implementing this suggestion may run afoul of Section 42A of the Insurance Act, 1938, which provides for prohibition of insurance business through multi-level marketing.
Conclusion
Mis-selling has always been a hurdle to increasing insurance penetration in India. The MISP Guidelines of the IRDAI were introduced to ensure fair practices in the distribution and servicing of motor insurance policies. However, instances of malpractice by MISPs continue to increase, as have been highlighted above along with suggestions to curb such practices. Effective solutions incorporated under regulations can help address these issues and protect the interests of customers in the motor insurance market.
Bringing the public-facing MISPs into the regulatory purview and strictly enforcing the code of conduct can aid policyholders in protecting their interests. Additionally, introducing an efficient mechanism of customers grievance redressal specifically for complaints against MISPs may incentivise MISPs to comply with their responsibilities under the MISP Guidelines. These measures, if implemented effectively in the MISP-brokers-insurer network, may lead to overall development of insurance market in the future.
Further, it is yet to be seen how the newly-formed Central Consumer Protection Authority reacts to the aforementioned practice of forced selling, since, arguably, it can also be brought under the ambit of ‘unfair trade practices’ under the Consumer Protection Act, 2019 while scrutinizing it under the IRDAI regulatory framework.
For further information, please contact:
Pranjita Barman, Partner, Cyril Amarchand Mangaldas
pranjita.barman@cyrilshroff.com
[1] The Automobile Sector in India, Research Unit, Press Information Bureau, Ministry of Information and Broadcasting, Government of India [February 17, 2023].
[2] Report of the Committee for Review of MISP Guidelines, Insurance and Development Authority of India [January 12, 2021].
[3] ‘RTO asks auto dealers to allow vehicle owners to choose insurance companies’, The Times of India, [February 9, 2020, https://timesofindia.indiatimes.com/city/surat/rto-asks-auto-dealers-to-allow-vehicle-owners-to-choose-insurance-companies/articleshow/74035263.cms]; ‘Vehicle dealers can’t force buyers to take insurance from them’, The New Indian Express. [January 4, 2018; https://www.newindianexpress.com/cities/kochi/2018/jan/04/vehicle-dealers-cant-force-buyers-to-take-insurance-from-them-1744000.html].
[4] IRDAI Order dated December 17, 2019 in the matter of Maruti Insurance Broking Pvt Ltd., IRDAI, IRDA/INT/MISC/ORD/227/12/2019; In Re: Fx Enterprise Solutions India Pvt. Ltd. & anr. and Hyundai Motor India Limited, Case no. 36 & 82 of 2014, Competition Commission of India, ¶112 [June 14, 2014]; referred to in the case In Re: Manav Seva Dham and Maruti Suzuki India Ltd. and others, Case No. 03 of 2022, Competition Commission of India, ¶15 [March 22, 2022].
[5] Distribution Fees, Guideline 15, MISP Guidelines.
[6] ‘Auto Dealers Seek Higher Sales Margin to Drive Profits’, BQ Prime, Bloomberg, [May 31, 2020;
https://www.bqprime.com/economy-finance/auto-dealers-seek-higher-sales-margin-cost-reduction-measures-to-tide-over-dwindling-profitability]. The data belongs to a regulatory period where commissions were capped.
