Irda asks GIC to honour pact with ICICI Lombard and HDFC Ergo, pay commission

MUMBAI: The insurance regulator threw out the national reinsurer General Insurance Re's decision to abandon payment of commissions to insurance companies which are mandated by law to reinsure 10% of all their policies sold, said two people familiar with the ruling.

The Insurance Regulatory and Development Authority ( Irda) has said the state-run GIC Re must honour its agreement with companies such as ICICI Lombard and HDFC Ergo to pay the commission as it was to meet their expenses, these people said.

"We are not deciding on whether GIC should pay commission, or not," said an Irda official, who did not want to be identified.

"We want GIC to follow the agreement that they had entered for 2011-12 with the companies," he added.

Last month, GIC decided to suspend payments of up to 15% of the total reinsured amount as commission unilaterally. That could have raised the policy premia and led losses of more than 700 crore to the general insurance industry.

The practice of paying the commission was to compensate the insurers for expenses in selling the policy, a part of which GIC was getting it as a right.

"The action of GIC Re in unilaterally withdrawing the commissions payable is set aside and they are directed to strictly follow and comply with the terms of the agreements already entered," Irda said in a note to GIC and insurers.

The regulator did not accept the argument that GIC's decision was taken under direction from the finance ministry.

"We cannot violate the regulator. We have received the circular and sent it to the ministry. Now, the ministry has to take a call," said Yogesh Lohiya, chairman and managing director at GIC.

The reinsurer is not under obligation to continue this next year and can do away with the provision next April when the contracts have to be renewed, meaning that at best it is just a temporary relief. Next year, reinsurers are expected to raise the premia due to rising frequency of catastrophes such as earthquakes and accidents. This could lead to insurers' passing it on to consumers pinching the wallet that is already depleting due to high prices across the board.