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IRDA's Guidelines on Web Aggregators

IRDA has produced "draft" guidelines on Web Aggregators (HT: Medianama) that will regulate "web aggregators. I now discuss the points in the guidelines (download here):

What are "Aggregators"?

Aggregators are web sites that give information on insurance products of multiple insurers. One part of their business model is to get money from the actual insurers or from large agents, on a per-lead basis – users compare products and like some of these products; a "lead" is thus generated, for which the insurer or agent might be happy to pay.

Of course, IRDA has no regulation on web sites – it’s a media property that IRDA has absolutely no jurisdiction to regulate – so IRDA is simply trying to regulate payments to such entities from insurers and agents that it regulates. If you build such a site and want to get paid anyone in the industry, you’ll have to adhere to the guidelines (which are "draft", not final).

Why?

No one knows. The IRDA has very little experience with actual regulation, considering the massive amounts of mis-selling that happens even now with insurance schemes. I get a call a day – I know.

The only thing I can think of is the IRDA wants to be known as doing its job with an entity that is barely surviving online (aggregator web sites) and who really don’t have the money to fight back. All insurers meanwhile are getting their agents to sell money-back policies as great investment products.

An aggregator has to register with IRDA.

This is a silly idea, in my opinion. You have to pay 10K to IRDA to register. That’s 10K down the drain, and a process that can be stalled under random whims and fancies. And then you can get inspected at any time. This is a sure way to create corruption – demand that every business entity get itself a "license". Already, insurers and brokers need to be licensed from IRDA, now even people who give information do? We’re back to the license-raj anyway.

Minimum Net Worth

The Aggregator has to have a net worth of 50 lakhs, for the past three years, and on an ongoing basis. Why? This is a strange requirement for a business which needs capital of less than a lakh to start – heck, you could write a full policy comparison and lead-gen engine for about Rs. 5,000 (the cost of the domain name and some PHP/database hosting). You don’t even need a physical office. In fact, you’re not selling the insurance, so you aren’t even liable for the sale (for misinformation, yes, but there’s a fraud law against that, and that’s criminal procedure, not IRDAs domain) Why 50 lakhs? As Medianama says, this needs to go.

Payment terms

  • Aggregators can only get paid by insurers or brokers if a "lead" converts to a sale. This is obviously to avoid massive numbers of leads randomly through databases or such, and siphoning out money from insurer kitties. Don’t laugh, worse has happened. But instead of punishing the perpetrators – and IRDA knows who they are – they choose to introduce regulation instead; I wish they actually worked on enforcement also.
  • Only 25% of the insurer’s first year’s premium, or the agent’s first year brokerage can be paid to the aggregator.
  • No subsequent year commissions for such leads. While this is strange, it might make sense in that the website isn’t really involved in servicing the customer post the lead-gen phase. But if you want to create a web site that helps customers understand how their policies (which they have bought) perform over time etc., you are out of luck if you expect longer term payoffs.
  • No advertising or other payments: The regulations have a very strange funda: 
  • An Insurer / Broker shall not pay the web aggregator fees or remuneration, by whatever name called, towards the costs incidental to the web aggregator’s activities including maintenance of the data base, infrastructure, training, entertainment, development, communication, advertisements, sales promotion etc.

    So an insurer can’t even advertise or pay to register. IRDA thinks this will avoid confusion to customers. But of course, IRDA won’t even bother to address actual mis-selling of banks selling insurance policies to customers, disguised as fixed deposits, not even ACKNOWLEDGING the problem with a press-release or anything. Well done.

No Lead Sharing

So if I want insurance but don’t know which, then there are stranger regulations proposed. You can only share info with one broker or five insurers, not both. This is micro-regulation at its finest. Imagine if TRAI were to tell you that you can speak to five friends per day, or two business partners, otherwise you have to buy a new phone.

Yes, lead duplication is a problem but this kind of regulation isn’t a way to solve it. If users complain, then act on individual complaints. (remember, it was the user who went and said I don’t know which insurer, but I’m interested, tell them to contact me!) The warning/fine/suspension argument situation is fine.

What is the solution?

Yeah, yeah, I know, if I think these regulations are nuts, what else would I suggest?

No registration required. No minimum net-worth. No payment term regulations. No concept of scrutiny. Just a statement saying you’re all welcome, but if you are found guilty of mis-selling, fraud, spam or such, we will Warn + Fine + Blacklist you, and create a mechanism for appeal and whistleblowing. Finished. That’s all you need, plus one or two heavy enforcements of big players – suddenly everyone behaves.

But if these regulations actually go through, what to do? You can’t be in the "lead-gen" business alone, that’s for sure. You have to be a broker. But since getting one composite license to service multiple insurers is a pain in the neck, you need to setup 10 companies to get 10 different insurance agent licenses. Then, have another company to run the information web site, but don’t let it get paid by the agent/broker companies – transfer leads to them, and they’ll make money from the lead conversion anyhow, and as a "group" you’ll make money.

You need to make money from actual transactions, not from leads. But the lead-gen model is full of fraud in India anyway, so you wouldn’t make much from it in the longer term.

This is crazy, I know, but eventually regulations will change. When they do, you can work at merging entities. I know from experience that this is not difficult or costly; you need a good accountant, that’s all. But it does raise the bar – this is no longer a basement/garage business, and you’ll need a few lakhs to get this working.

  • santosh navlani says:

    >This is as stupid as a regulator can get. Instead of welcoming innovation & customer friendly initiatives, IRDA manages to create a barrier big enough for prospective start-ups from entering the space. You are right…the only model remaining for those web aggregators is become a broker. This requires a paid equity capital or net-worth of 50 lakh rupees!!! I've never understood in first place why IRDA requires exclusive agencies for every insurance company….and this one more comes in. Sad!

  • Deepak Shenoy says:

    >Santosh: They don't need exclusive agencies per insurance company, but certain IRDA circulars have made it very painful and difficult to get a composite license…they are called "corporate" agents or some such thing.

  • Santosh Navlani says:

    >Hi Deepak,
    Yes, Deepak. i'm aware that getting a license which allows to sell multiple insurance company products is tough (paid-up cap req of 50 lakhs is one the biggest deterrent). What i meant to say is why can 1 agent only sell one insurance co policies when the loop-hole is available where people take agencies in the name of wife, brothers, etc. Why can't be it simpler like the MFs where its upto the agent/advisor who decides which & how many cos he be tying up with. i don't see any rationale in this rule of IRDA.

    Santosh

  • Deepak Shenoy says:

    >Santosh: I agree. It hardly makes any sense 🙂 The multi-insurance-company licence is just silly