Source: ET
Context:
The Insurance Regulatory and Development Authority of India (IRDAI) has changed how the top bosses of insurance companies will be paid. From now on, a big part of their bonus, incentives, and other variable pay will depend on how well they look after customers, how fast they settle claims, and how quickly they solve complaints. The new rules apply to Managing Directors (MDs), CEOs, and other Key Management Personnel (KMP) of life, general, and health insurance companies. They take effect right away and will be used to judge performance from FY 2026-27 onwards.
Key Highlights
- Regulator: IRDAI.
- Effective: Immediate, used for FY 2026-27 performance reviews onwards.
- Who is affected: MDs, CEOs, Whole-Time Directors, and other Key Management Personnel of insurance companies.
About the News
What has IRDAI changed?
The way senior executives of insurance companies earn their variable pay (bonus and incentives). From now on, half of their performance score will be based on customer-focused and governance-focused rules set by IRDAI, and the other half on company performance set by the board.
Which two parameters carry a fixed 10 per cent weight each?
(a) Implementation of Indian Accounting Standards. (b) Removal of dark patterns in the company’s interactions and through its distributors.
How will customer service now be tracked?
(a) How many claims are settled within 15, 30, and 60 days. (b) How many claims are still unresolved at the end of each reporting period. (c) Complaints counted separately from service requests. (d) How many complaints are resolved within set timelines. (e) Most of these have to be disclosed every month.
How is executive pay transparency improved?
Each insurance company must put the parameters used to decide executive pay, along with three years of performance trends, on its website in a simple, easy-to-read format.
Why does the risk symmetry rule matter?
Because insurance is a long-tail business. A policy sold today may create claims many years later. If executives are paid heavily today for short-term gains, the company can run into trouble later. The new rules tie pay to actual risk taken and the time horizon of that risk.
Background Concepts
What are “Dark Patterns”?
Dark patterns are tricks used in apps, websites, and forms to push people into doing something they didn’t really want to do, like buying an extra cover, missing a cancellation deadline, or agreeing to charges hidden in fine print. Common examples include pre-ticked boxes for add-on covers, hard-to-find unsubscribe options, misleading “auto-renew” designs, and urgency or scarcity tricks like fake countdowns. In India, the Central Consumer Protection Authority (CCPA) issued the Guidelines for Prevention and Regulation of Dark Patterns in 2023, which list specific banned patterns. IRDAI’s new rule makes the removal of dark patterns part of how an insurance company’s top executives are judged, giving the issue direct teeth in the boardroom.
Who are “Key Management Personnel (KMP)” in an insurance company?
Key Management Personnel are the most senior decision-makers of the company. In insurance, KMPs usually include the Managing Director (MD), Chief Executive Officer (CEO), Whole-Time Directors (WTDs), Chief Financial Officer (CFO), Chief Risk Officer (CRO), Appointed Actuary, Chief Investment Officer (CIO), Chief Compliance Officer, Chief Marketing Officer, and others identified by the board. They are the people whose decisions most directly shape policy design, pricing, claim handling, investments, and customer experience. IRDAI’s revised pay rules apply to this group.
What is the “Persistency Ratio” in life insurance?
Persistency ratio measures how many life insurance policies are still active (premium paid) after a given period. For example, a 13-month persistency of 80 per cent means 80 out of every 100 policies sold last year are still being renewed after 13 months. Higher persistency means customers are happy, the insurer earns renewal premium, and the policyholder gets the long-term benefits the policy was meant to provide. Low persistency means mis-selling, surrender, or lapse, which hurts both the customer and the insurer. IRDAI specifically tracks persistency as one of the financial-soundness measures for life insurers under the new framework.
Practice MCQs
Q1. With reference to IRDAI’s recent changes in executive pay rules for insurance companies, consider the following statements:
- The rules apply to Key Management Personnel including MDs and CEOs of insurance companies.
- The changes will be used to assess performance from FY 2026-27 onwards.
- Fifty per cent of the performance score will be based on parameters set by IRDAI.
- The remaining fifty per cent will be based on company performance, with parameters set by the board or the Nomination and Remuneration Committee.
How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None
Q2. Consider the following statements about the parameters under IRDAI’s new performance framework:
- Implementation of Indian Accounting Standards carries a fixed weight of 10 per cent.
- Removal of dark patterns in customer and distributor interactions carries a fixed weight of 10 per cent.
- Claim settlement responsiveness and grievance redressal are part of the IRDAI-prescribed parameters.
- Performance disclosures relating to claims and complaints must be updated quarterly.
Which of the above are correct? (a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
Q3. With reference to “dark patterns” in the consumer protection framework, consider the following statements:
- Dark patterns are design tricks that push users into actions they did not intend.
- The Central Consumer Protection Authority issued guidelines on dark patterns in 2023.
- Pre-ticked add-on boxes, hard-to-find cancel options, and fake urgency are examples of dark patterns.
- IRDAI has linked the removal of dark patterns to executive performance pay in insurance companies.
Which of the above are correct? (a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
Q4. Consider the following statements about persistency ratio and customer-service measures in insurance:
- The persistency ratio shows how many life insurance policies remain in force after a given period.
- A higher persistency ratio generally indicates greater customer satisfaction with the policy.
- Under the new IRDAI framework, insurers must publicly disclose the proportion of claims settled within 15, 30, and 60 days.
- The Risk Management Committee plays no role under the new IRDAI executive pay framework.
Which of the above are correct? (a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four
Answer Key
- (d), All four statements are correct.
- (a), Statements 1, 2, 3 are correct. Statement 4 is wrong; claim handling, complaint redressal, and product performance must be updated MONTHLY, not quarterly. Only the financial soundness numbers are updated quarterly.
- (e), All four statements are correct.
- (a), Statements 1, 2, 3 are correct. Statement 4 is wrong; the Risk Management Committee does have a role. The Nomination and Remuneration Committee must consult the Risk Management Committee to make sure pay is fair, risk-aligned, and sensitive to the time horizon of risks.
