The institution of referral providers is widespread in the insurance sector across regimes and has a crucial role in distribution of insurance products. Referral providers facilitate the expansion of insurers among segments that otherwise may not be readily accessible to them through their own channels of distribution. While in certain cases the referral activity is limited to provision of data of their clients, in many cases it includes introduction of clients, provision of office space for the employees of insurer, display of publicity material etc. Since the activities of a referral provider stop short of selling, they normally do not require a regulatory license. Referrals are much sought after in the insurance industry since they not only are in possession of data of a large number of clients but also are generally in know of the personal details with regard to their financial status, which is of crucial importance to the insurers. Moreover, some of these entities enjoy a great amount of goodwill among the clients which gets transferred to the insurer through their introduction, thereby enhancing the likelihood of a successful sale. Referrals, thus, play a key role in a speedier expansion of the sector and in reaching out to large chunks of population that may not otherwise be accessible through the conventional distribution channels of insurers. A. The existing guidelines on referrals: 1. They deal only with Life Insurance. A revised circular on general insurers was to follow later as per the circular, but is yet to be issued. 2. The circular confines itself to referral arrangement with banks and does not refer to such arrangements with non-banking entities. 3. An insurer shall not enter into an arrangement with any bank which has been licensed to act as an agent or as an intermediary. 4. A bank shall be allowed to enter into such arrangements with only one life insurer and one general insurer. B. Existing Practices: 1. It was noticed during the market conduct inspection of some of the life insurers that they are also entering into referral arrangements with a variety of non-banking referral entities. Many insurers had in fact entered into referral arrangements with individuals.
3. It has been noticed on some occasions that the parties have included extraneous clauses in their agreements. In the absence of standardization each of the agreements is at present being scrutinized to check for any unacceptable clauses. C. The need for fresh guidelines on referrals: 1. Referrals are seen to increase the already spiralling costs of insurers. Therefore in the interest of prevention of further escalation of costs it is important to streamline the fee structures allowable to these entities. 2. The present circular deals only with banking referrals, leaving the whole area of arrangements with non-banking entities including individuals unregulated and unchecked. 3. Clause 10 (1) (vi) (ii) of advertisement regulations allows a third party group or association to furnish the data of its members to an insurer and be compensated for the same on the basis of sales made out of the references. However, no limits or ceilings have been prescribed by the regulations in connection with these payments. This clause has been put to misuse by some insurers in making excessive payments towards references obtained by them. 4. There is therefore a need to scrap the above provision in the IRDA (Insurance Advertisements and Disclosure) Regulations, 2000. 5. There is a need to clearly spell out, in the new regulations, the categories of entities that may be permitted to take up referral activity to ensure that this activity is carried out in a streamlined manner. D. Recommendations of the Govardhan Committee: a. The expenses of management including referral fee should be capped by section 40B of the Insurance Act, 1938. b. Referral fee should be paid only on successful conversion, with a linkage to sale by the company’s sales person and such fees and other costs incurred on the entity should not exceed the ceilings on commissions as provided under Sec 40A of the Insurance Act. c. Trail fee, including other expenses, subject to the overall cap of section 40A, can be paid for the referral arrangements. E. In the above context and recommendations of the Expert Committee, it is felt that the referral business in the insurance sector shall be regulated under a framework which will ensure that the interests of the policyholders are protected. A draft regulation is hereby published for eliciting opinion of the consumer organizations, policyholders, general public, insurance companies and various other stakeholders in the insurance sector. The draft along with the recommendations received from various stakeholders will be placed before the Insurance Advisory Committee and the Board of the Authority for their consideration. Hence it is requested that the comments on the said exposure draft may be forwarded to Mrs. Babita Rayudu, OSD (Legal) or to email id babitar@irda.gov.in on or before 27.05.2010. Sd/-
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