Amid slowdown fears, dealers face Rs 1,500 crore of unpaid premiums
This is even as dealer payouts to the tune of Rs 1,000-1,500 crore lie unpaid for more than three months, due to the changes in IRDAI regulatory norms making it mandatory for insurance companies to put a 30 percent cap on their expenses from April 1, 2023.
With domestic auto sales in the slow lane, auto dealers are facing multiple challenges of rising interest costs due to climbing inventories, and a change in IRDAI norms from April 1, 2023, which is further expected to slim down existing commission structures, putting greater pressure on their bottom lines.
This is even as dealer payouts to the tune of Rs 1,000-1,500 crore lie unpaid for more than three months, due to the changes in IRDAI regulatory norms making it mandatory for insurance companies to put a 30 percent cap on their expenses from April 1, 2023. This change has put a permanent squeeze on their insurance margin payouts, as dealer commissions are likely to get even thinner, said representatives of leading dealerships at the recently concluded second FADA summit on Banking and Insurance in Mumbai.
Simply told, the new rules indicate that insurance companies cannot spend more than Rs 30 to canvass for premiums worth Rs 100, and should they collect Rs 70 as a premium, the highest expense they can incur is Rs 21.
FADA President Manish Raj Singhania commenting on this, said that dealer margins will be further crunched, adding to the squeeze in earnings. "Insurance payout is a significant source of income for the dealerships.” Commenting on the pending insurance payouts, Singhania added that the pending dues are adding pressure on dealers' finances, and "we are hopeful of resolving the issue in the next 10-15 days," he indicated.
Another large Delhi-based dealer sharing his perspective on the current issue said, "We are still in the dark as to how much margin we will get post rationalisation of the commission structures, as OEMs and insurance companies who control the insurance payouts would want to retain a chunk of the 30 percent expenses and reduce the outgo to the dealership," added.
On the margin rationalisation, the FADA President said that "talks are on at the moment with the insurance companies and hopefully the dealer community which is generating the business for the insurance company and OEM's intermediaries should win and get the largest chunk of the insurance premium."
As per the IRDAI circular on Motor Insurance Service Providers (MISP) dated November 1, 2017, "An insurance intermediary based on objective and transparent criteria can enter into service level agreements with general insurers for selling motor insurance policies."
The summary of these pending dues from April 1, comes from the insurance companies’ ambitions to collect higher premiums from dealerships that have significant business potential and offer a higher payout to dealers. This bonus was paid over and above "the 17.5 percent commission if they did business with the insurance company through the MISP, or 18.5 percent commission if the business was done directly by the dealerships as mandated by the regulator with the insurance firm", dealers stated.
Sai Girdhar, Secretary of FADA who is also a Skoda and Volvo dealer from Rajasthan told Autocar Professional that the additional payout made by insurance companies to dealerships, for gaining additional premiums from customers, had become a regular feature since 2017 and the funds were routed through its direct selling agent or another company showing it as an expense in the insurance company books as marketing activities or a payout given to the dealer to compensate for his advertising expenses.
But when the government agencies got a whiff of this indirect routing, both GST and income tax authorities got into litigation with the insurance companies, as to "why insurance companies failed to pay GST on these transactions which were part of the dealer's income but treated as an expense," the FADA Secretary said sharing his perspective on why this crisis has gone out of hand for the dealerships at the moment.
H.O.Suri, Managing Director, IFFCO Tokio Insurance told Autocar Professional that the insurance industry is facing multiple regulatory issues. Commenting on the dealer's pending payout, he said "The insurance industry is facing multiple challenges from various fronts. Industry participants have agreed in principle that by the end of this month or early next month, we will decide on the future commission's payout and also clear the pending dues of the dealers. Suri said.
However, Girdhar says that "The commitments that insurance companies have made to the dealers have to be fulfilled and we have waited for three months for the issue to be resolved. With overall finances under pressure, it will get extremely inconvenient if payouts are stretched any further."
More than 30 Insurance companies are facing a combined liability of Rs 6,000- Rs 6,500 crore to the government and the auto sector. The situation is such that the total paid-up capital and reserves of the insurance companies will get wiped out if the liabilities are enforced, said industry experts sharing their concerns at the FADA Summit.
"If you take into account these transactions from 2017 till now, insurance companies will owe more than Rs 5,000 crore to the government as the total pending dues of unpaid GST and income tax, with interest since 2017 when the MISP was introduced. Also, Rs 1,000- Rs 1,500 crore they owe to other dealerships of unpaid premiums," added a leading dealer for passenger cars based out of Mumbai.
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