IRDAI's Directive to Lower Premiums in Direct Insurance Plans

Feb 05, 2024 / Reading Time: Approx. 5 mins

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IRDAI's Directive to Lower Premiums in Direct Insurance Plans

As the insurance landscape evolves, the Insurance Regulatory and Development Authority of India (IRDAI) continues to introduce transformative initiatives. In a significant move, IRDAI has introduced new guidelines aimed at enhancing accessibility and affordability in the insurance sector. These guidelines are specifically directed at direct-to-consumer (D2C) insurance plans, also known as direct insurance plans, advocating for reduced premiums to benefit policyholders opting for such plans.

This proactive stance underscores IRDAI's commitment to fostering a more consumer-centric and competitive market environment. This article elucidates the implications of IRDAI's directive, exploring how it shapes the future trajectory of insurance distribution in India and empowers consumers to make informed financial decisions.

Many people believe that insurance is a type of product that needs to be pushed onto customers, as they don't often recognise the importance of having it until a major event occurs. Consequently, intermediaries such as agents or brokers play a pivotal role in facilitating communication between insurers and clients, persuading them to invest in insurance coverage. However, with increasing awareness of insurance benefits, particularly heightened by the COVID-19 pandemic, individuals are now actively seeking and purchasing insurance policies online.

Acknowledging this shift, the Insurance Regulatory and Development Authority of India (IRDAI) has issued fresh directives concerning direct-to-consumer (D2C) insurance plans, commonly known as direct plans. IRDAI urges life insurance, general insurance, and standalone health insurance entities to formulate board-approved policies for directly procured insurance, eliminating intermediaries. Furthermore, insurers are advised to reduce premiums for policies acquired directly by policyholders.

According to the IRDAI's gazette notification, insurers are mandated to establish a board-approved policy annually, outlining the methodology for transferring benefits to policyholders in the form of reduced premiums resulting from expense reduction and/or directly sourced business.

The notifications said, "Every insurer shall have a well-documented policy approved by its board on an annual basis, which shall specify the manner of transfer of benefits, arising from reduction of expenses and/or from directly sourced business to the policyholder by way of reduction in premium."

Traditionally, buying an insurance policy involves several steps, including getting in touch with an insurance agent, completing necessary paperwork, and awaiting processing. However, the emergence of online platforms has streamlined this process, leading to quicker turnaround times. Moreover, consumers nowadays have a better understanding of insurance intricacies compared to previous years. Consequently, there has been a notable surge in online policy sales in the recent past, predominantly through direct channels.

Direct Insurance Plans, available directly from insurers typically via online platforms, bypass intermediaries. Through these plans, policyholders can directly engage with insurers' websites to select and buy insurance policies. All insurance companies now maintain their own online portals for customer interaction, enabling swift transactions and claims processing without third-party involvement. It is important to note that policies bought through third-party portals do not qualify as direct insurance plans. Furthermore, once a policy is procured through an intermediary, transitioning to a direct plan is not possible.

By eliminating intermediaries like agents or brokers, policyholders effectively reduce Expenses of Management (EoM), which is a fraction of premiums comprising commissions, employee wages, technology expenses, administrative costs, and similar expenses. Currently, insurers can sell policies directly without passing on savings from reduced commissions. However, the regulatory body now mandates insurers to extend this benefit to policyholders starting April 01, 2024.

Let's Examine the Advantages and Disadvantages of Direct Insurance Plans.

1. Direct Insurance Plans function similarly to direct mutual funds, enabling individuals to invest directly in schemes without involving a distributor or agent. Likewise, direct insurance plans offer the flexibility to purchase policies at one's convenience, without external pressure to opt for specific coverage.

2. Buying an online insurance policy directly from the insurer offers great convenience, allowing buyers to complete transactions from the comfort of their homes. Moreover, the inclusion of supplementary riders and add-ons provides customisation options, especially for term insurance and health insurance plans.

3. With insurers now offering direct plans without the embedded commission fees, these policies are more cost effective than traditional insurance purchasing methods.

Despite Their Benefits, Direct Insurance Plans Come with Certain Drawbacks:

1. One drawback is that brokers provide a range of options, including premium choices, exclusions, and claims settlement ratios, offering customers various selections before finalising a policy.

2. Purchasing through an agent or broker offers several advantages, such as access to multiple offers from different companies, transactions facilitated by a trustworthy intermediary, and assistance throughout the claims settlement process.

3. Insurance can be complex for many individuals, necessitating guidance and support, which may be challenging to get without a broker's assistance.

Should You Consider Purchasing Direct Plans in Insurance?

As discussed in an earlier article, one of the primary directives issued to insurance firms includes formulating transparent policies regarding the commission framework for agents and brokers. Moreover, they are tasked with implementing strategies to diminish Expenses of Management (EoM).

Direct Plans present cost benefits by eliminating embedded commissions, rendering premiums more economical compared to traditional ways of purchasing insurance. Historically, customers were reluctant to buy insurance through direct plans due to the absence of discounts from insurers. They preferred understanding product details and conducting price and feature comparisons with a trusted expert, often someone they personally knew.

The decision to buy Direct Plans in insurance depends on factors such as familiarity with insurance products, understanding of the insurer, and comfort with online transactions, renewals, and claims settlements. Familiarity with the insurer and the policy, coupled with confidence in the claims process, make direct purchases advisable, leading to potential premium savings.

Even for those unfamiliar with insurance jargon or unsure about policy selection, numerous websites, like PersonalFN, focus on customer education and comparison tools, aiding in policy selection. However, for newcomers requiring guidance and assistance throughout the process, traditional purchasing methods remain viable. It is important to note that transitioning to a direct plan is impossible once a policy is bought through an agent.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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