Discussions on this matter have taken place in Life Insurance Council meetings over the past few months, two sources told The Economic Times. While a formal letter from the council is pending, the sources state that talks are in an advanced stage, aiming to establish self-regulation in this regard, they added.

The development comes as the industry adjusts its marketing practices in response to IRDAI's decision to replace product-wise caps with company-wise ones, a move prompted by insurers facing GST evasion charges, as per the report.

The Insurance Regulatory and Development Authority (IRDAI) is the regulatory authority of the insurance sector.

What is the issue?

In March, the regulator introduced the IRDAI (Payment of Commission) Regulations, shifting from the traditional product-specific commission structure to an overall cap on expenses within insurance companies. The directive mandated managing operations within a 30 percent overall expense limit. Despite being allowed to pay 5 percent on commissions until March, insurers often opted for higher overriding commissions of 30-35 percent or more to enhance market share, the report said.

It was thus found that in certain insurer-bank or insurer-NBFC partnerships, where a housing loan of ₹1 crore aligns with a policy sum assured of the same amount, the premium has surged to 35 percent, up from 5 percent until March, it added.

Credit life insurance, a type designed to aid loan repayment in case of the insured person's demise before full repayment, has seen a significant increase in premiums. While the policy is optional, if chosen, its cost is added to the loan principal.

Activities under scanner

The alteration in commission structures was prompted by scrutiny from the GST authorities, who issued show-cause notices to numerous insurance companies. The investigation revealed that insurers were paying overriding commissions to agents through vendors, falsely categorized as marketing, advertising, and manpower supply costs, evading tax without actual services rendered.

Many insurance companies are now under examination for providing overriding commissions to banks and intermediaries, in addition to regular commissions. This practice raises concerns about potential exploitation and an increase in management expenses within the insurance industry.

The investigation brought to light that insurance companies were covering banks' employee costs through intermediaries, not transparently represented in their financial records, leading to non-disclosure and potential violations of tax laws.