background
India’s automotive sector is growing rapidly and contributes over 7% to India’s gross domestic product.[1]. Annual sales of passenger cars exceed his 20 million units, and with the mandatory vehicle insurance, the sales of the auto insurance business have also increased proportionately. This segment currently accounts for 45% of the total general insurance business in India.[2]
Car dealers are the main point of contact with customers when purchasing car insurance products in the market. Prior to 2017, these dealers partnered with insurance companies, brokers, and agents to procure auto insurance. In 2017, Insurance Regulatory and Development Authority of India (“Irdai”) Guidelines for Automobile Insurance Service Providers, 2017 Edition (”MISP Guidelines), following the report of a committee set up to consider payments to car dealers. This guideline regulated the distribution of auto insurance business by auto dealers.
In recent years, there has been an increase in the number of cases involving car insurance service providers (“MISP”) forcing a prospective customer to purchase a specific policy at a specific price. In fact, such a refusal to purchase insurance from his MISP, although within the customer’s rights, may lead to a complete refusal to sell the car. The Road Transport Authority (RTA) has also issued a warning to car dealers after receiving complaints regarding the above-mentioned practices.[3]
Similarly, IRDAI strongly opposes indirect exploitation perpetrated by MISPs and associated brokers, and threatens to deny cashless claims facility if customers refuse to purchase insurance from MISPs. . In a lawsuit against Maruti Insurance Broking Ltd. (“MIBL), IRDAI has held that denying cashless claims to policyholders who have not purchased insurance from a MIBL-sponsored MISP is discriminatory and violates the code of conduct set out in the MISP Guidelines. It was determined that the[4] IRDAI also observed that MIBL-sponsored MISPs were violating guidelines and manipulating insurance business by conducting business in a manner prejudicial to the interest of policyholders. IRDAI imposed a fine of Rs 30 crore on him on MIBL for violating his MISP guidelines.
MISPs that partner with insurance companies or insurance intermediaries stand to make significant profits by selling auto insurance policies directly to customers. This is because the margins obtained are almost equal to, or even higher than, the margins associated with car sales. IRDAI allows the insurance company to pay around 19-22% of the total premium as commission to his MISP.[5]Car dealers, on the other hand, earn around 4-7% profit from vehicle sales.[6] These dealers recognize that the commission they earn from selling a vehicle is equivalent to the commission they earn from selling an insurance policy. For car dealers acting as MISPs, car insurance can become one of their primary products rather than an ancillary risk hedge in carrying out the normal business of selling cars.
IRDAI had set up a MISP guidelines review committee in 2019. The MISP Guidelines Review Committee submitted its report in January 2021 (“Committee Report, 2021”). The 2021 Commission Report acknowledged problems with MISPs attempting to solicit only select insurance from a limited number of insurance companies, limiting the choices offered to customers. 2021 Highlighting the practices reported in the on-site inspection report on MISP, the 2019 Commission Report stated: “MISP failed to offer potential customers the choice of auto insurance from a variety of insurance companies.”.
MISP Guidelines
A motor vehicle insurance service provider is defined under the MISP guidelines as a motor vehicle dealer appointed by an insurance company or insurance intermediary to distribute and/or service motor vehicle insurance policies for motor vehicles sold. Based on the MISP guidelines, any car dealer is eligible to become her MISP for selling and servicing car insurance policies, including supplementary insurance.
IRDAI has also prescribed a code of conduct to be followed by MISPs (“code of conduct”) Based on the MISP Guidelines in Chapter III. Further, IRDAI reserves the power to cancel the appointment of a MISP in case of violation of the Code of Conduct. Based on the Code of Conduct, MISPs have the right to purchase motor insurance from various insurance companies. There is an obligation to offer policy options to customers.The Code of Conduct further provides that MISPs must not: (a) offer potential customers/policyholders; (b) must not deny a customer the right and choice to seek auto insurance; (c) direct or indirect imposition of risk selection or suppression of prospective customer/policyholder selection by an insurance company; and (d) on uninsured customers. We purchased vehicles from each MISP soliciting auto insurance business.
Therefore, the MISP practices prevalent in the industry are in direct violation of several provisions under the Code of Conduct. But without an effective grievance redress mechanism, customers are left helpless.
Further, MISP is not classified as an “insurance intermediary” under the IRDAI Act, 1999. This hinders effective regulatory oversight by her IRDAI, which it exercises over other intermediaries. Not being recognized as an insurance intermediary means that the MISP is not required to register with his IRDAI or renew his registration under Section 42D of the Insurance Act, 1938.
Way forward
IRDAI and the insurance industry are considering the following as possible solutions:
- MISP comes under the regulatory jurisdiction of IRDAI: Under the MISP guidelines, there is no provision that empowers IRDAI to impose penalties on motor vehicle dealers operating as MISPs. If MISP-related irregularities come to light, IRDAI may impose penalties on the insurance company or intermediary. However, the only recourse available to IRDAI against his MISP is to cancel the MISP appointment directly. Since MISPs are similar to other insurance intermediaries and perform equivalent functions, IRDAI has brought MISPs under regulatory supervision by notifying them as intermediaries to directly address the issue of policyholder exploitation. I can.
- Necessary protective measures available to motor insurance policyholders/customers: IRDAI, in consultation with insurance companies, will assist in setting up a specific grievance redressal department/help desk for customer complaints while dealing with MISP. Violations by MISP will have to be recorded and followed up with action that may be taken by IRDAI during or during renewal. For this.
- Adoption of the 2021 Commission Report Proposals: The 2021 Commission Report proposed to institutionalize MISP under the IRDAI mediation framework by providing two options:
- First, MISP is a distribution channel for soliciting auto insurance business, subject to certain conditions such as contracts with insurance companies, prohibition of premium collection, and access to customers for online payments to insurance companies. You can migrate. To incorporate this structure into the current IRDAI framework, authorities will need to introduce regulations to govern MISPs, similar to regulations for corporate agents, brokers, etc.
- Second, MISPs can transition to sub-brokers or sub-agents and work for brokers or corporate agents, subject to regulatory requirements such as registration requirements, codes of conduct, and the use of technology to monitor and monitor MISPs. . These options, along with other regulatory requirements, will be made available to auto dealers acting as his MISPs if the recommendations in the 2021 committee report are accepted by his IRDAI. However, the possibility of implementing this proposal could conflict with section 42A of the Insurance Act 1938, which prohibits multi-level marketing insurance business.
conclusion
Mismarketing has always been an impediment to increasing insurance penetration in India. IRDAI’s MISP guidelines were introduced to ensure fair practices in the distribution and service of motor insurance policies. However, as highlighted above, instances of fraud by MISPs continue to increase, and proposals are being made to curb such practices. Effective solutions incorporated based on regulations can help address these issues and protect customer interests in the auto insurance market.
Bringing public MISPs within the scope of regulation and strictly enforcing codes of conduct will help protect the interests of policyholders. Furthermore, implementing an efficient mechanism for customer complaint redress specific to complaints against MISPs could encourage his MISPs to comply with their responsibilities under the MISP Guidelines. If these measures are effectively implemented in his MISP-broker-insurer network, they could lead to the development of the entire insurance market in the future.
Moreover, it is not yet clear how the newly established Central Consumer Protection Authority will react to the aforementioned forced sales actions. This is because this may also fall under the category of “unfair trade practices” under the Consumer Protection Act. in 2019 while under scrutiny under the IRDAI regulatory framework.
[1] Indian Automobile Sector, Research Unit, Press Information Bureau, Ministry of Information and Broadcasting, Government of India [February 17, 2023].
[2] Report of Insurance Development Authority of India MISP Guidelines Review Committee [January 12, 2021].
[3] “RTO asks car dealers to allow car owners to choose their insurance company,” the Times of India reported. [February 9, 2020, https://timesofindia.indiatimes.com/city/surat/rto-asks-auto-dealers-to-allow-vehicle-owners-to-choose-insurance-companies/articleshow/74035263.cms]’Car dealers cannot force buyers to purchase insurance,’ says 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 17th December 2019 on 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 and 82 of 2014, Competition Commission of India, ¶112 [June 14, 2014]; Manav Seva Dharm and Maruti Suzuki India Ltd. and others referred to in Case No. 03 of 2022, Competition Commission of India, ¶15 [March 22, 2022].
[5] Distribution Fees, Guideline 15, MISP Guidelines.
[6] “Car dealers seek higher sales margins to boost 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]. This data belongs to the regulatory period when fees were capped.