Insurance

IRDA has released guidelines for “web aggregators”. (I’ve written about this earlier) These are final guidelines and will be applicable from February 2012.

There has been some consternation regarding these guidelines. Medianama believes that these are “disastrous for the industry”. PolicyBazaar.com – which will have to get regulated now – is unhappy and says “the guidelines will result in companies like us not to function”. But before we go around getting knee-jerk reactions on overregulation, note that this is not really huge information.

Simplified:

• Aggregators that show multiple products on their web sites need to pay 10K to register with IRDA and have a minimum net worth of Rs. 10 lakhs
• Aggregators can’t be an insurance agent or a related party.
• Insurers are allowed to pay aggregators a LOT of money:
• Upto Rs. 1 lakh per product (each insurer has about 20-30 products),
• Plus Rs. 10 per lead,
• Plus 25% of the commission paid on an actual sale.
• That 25% is only for first year premium.
• Insurers can’t pay aggregators in any other way than the points above.
• Aggregators can’t show ads.
• They can’t have “opinion” pieces – that is, they have to only show facts (comparable or otherwise), but can’t say that they don’t like this insurer or even that, look, so many people have disliked this product. They can only present facts.
• Aggregators can’t have ratings
• If a user asks for a particular insurer, his details can only be shared with that insurer. If he doesn’t specify, the aggregator can pass it on to a max of 3 insurers.

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.

According to industry sources, the average pay per lead today is Rs. 80 to Rs. 100 (fairly generous if you ask me)

Lead-gen is ONE business model for aggregators. There are many more:

a) Advertisements. Sadly the industry wants to get ads from insurers. What a dumb model that is. How can you be an unbiased comparison site if you allow ads from some insurers to be prominently displayed? It’s like going to a competition where a judge is a close friend of one contestant’s mother. [According to me, an online insurance lead is much more likely to buy books, or clothes, or watches, or a car; get those ads instead.]

b) Charge the customer: This model has, quite simply, not worked for a pure comparison site. But consider that any insurance advisor – or financial advisor – needs to offer the best kind of solution to her customers. So if you have technology to aggregate information, and an advisory layer on top that provides the hand-holding and the decision support, you can charge the customer for advice.

(Note that the above three models are independent of each other.)

But Can IRDA regulate a web site?

IRDA has no jurisdiction on web sites which are a media property. If I’m not an insurance broker,agent or insurer, IRDA cannot regulate me, period. It can huff and puff, but it can’t blow the house down. The issue of jurisdiction, though, is complex and I’m not a lawyer, but you have to note a few things:

1) IRDA is about regulating insurance. It has power over insurance companies, their products, their commissions, the agents and that ecosystem.

2) IRDA doesn’t even regulate all insurance. Postal insurance and RBI deposit insurance are out of it’s ambit, for instance.

So basically, before we get our knickers in a twist, it’s important to note what IRDA is trying to do here and who they’re planning to address.

They can’t regulate a generic web site. They can, however, control what payments are made to what kind of organization – because if they didn’t, the insurers would easily be skimming off money to agents as commissions (which are regulated strictly now). Commissions are a sore point for insurers, who like to build complex products that no one understands and sell them to people who trust them, and eventually charge 100% of some premium as commissions. To stop that habit, IRDA has grudgingly made rules to compel the insurers to reveal who they pay for what and how much, and restricted total commissions to a certain pre-approved level.

Therefore, yes, IRDA can control who insures and brokers pay.

And it follows that many comparison sites earn from lead-gen, so IRDA can regulate what they do as well, and they stand to lose their revenue source. But only for paid-for-lead-gen sites.

An aggregator that survives on advertising or on charging the customer direct is not going to be subject to these rules. If you choose not to be a lead-generator, you don’t have to follow these rules.

Why Do You Keep Saying That?

Because while it seems to me that while web sites are complaining, they do have a choice.

You couldn’t get into the press box in the IPL if you didn’t adhere to the strict guidelines of BCCI. You can’t show more than X minutes a day, you can’t do this, you can’t do that. But that doesn’t stop people from covering it after seeing it on TV. Or by being in the regular crowd. No, they wanted the press recognition and the invitation to events, so they decided to go with the rules. That’s the way the game is played.

Apple doesn’t allow you to sell an app on its app store if they don’t like it. In some cases they have no logical reason to deny apps, but they do. And developers CAN get around it, by doing something for Android instead, for instance. There is a choice. If you want to play, you play by rules of those that own the playground.

IRDA ring-fences the insurance playground. So if you want to work with their jurisdiction, you must play by their rules. Otherwise, you can continue to be an aggregator site without getting paid for leads by the insurers or brokers.

So Is The Regulation OK?

Not necessarily. Like I’ve said, it’s dumb to put a 10K fee plus a 10 lakh net worth requirement. Dumb, because it’s pandering to the rich. Today, anyone can create a comparison site – technology, greps and calculations are all it takes. But then, as I’ve said, this guideline only applies if you’re willing to give up any lead-gen based revenue – which I argue is a short-lived concept in India anyhow.

I also find the “only two insurers” excessive. Instead, IRDA should improve its ombudsman and actually respect complaints.

Much of my arguments are the same as earlier, which you’ll find here. To summarize, I think IRDA needs to increase its addressing actual misselling and fraud, instead of putting blanket rules. Also I think IRDA is probably within its limits to restrict payments from entities they control.

(Note: my advice of having a sister entity that does an actual agency still applies – while aggregators can’t be brokers, brokers can have an aggregation web site that has the no-ads/no-opinion content criteria of the regulation)

And Is The Criticism OK?

Much is lost in the translation. Mechanisms to rate insurers, or to regulate the income of aggregators for leads, or to disallow advertisements have been railed against, but what was missed was that you don’t need to be paid for leads. 

If you don’t get paid for leads, then yes, you can compare, you can rate, you can put ads. IRDA is not in the picture.

Some will say, boss, there is no money in client advice or ads. But the flip side is that lead-gen creates issues with malpractice. An aggregator might push one product because of higher commissions, even subtly. Ads will confuse the user about site bias. IRDA has a right to regulate this where they can.

Finally, the business model of getting paid to give a name and phone number itself is very very shady (I always enter ASDF and a random birthday or phone number on all these sites anyway). There is spam abuse, and also abuse of trust – aggregators today might liberally share your information without fear of a law to restrict them.

That these rules are too restrictive or that regulators are getting too high handled needs to be understood better. We often accept silly, arbitrary regulation in other places (App Store, IPL, even Abhishek and Aishwarya’s baby media coverage) because it’s what you “pay to play”. I expect that this regulation will be toned down eventually as the market matures.

Meanwhile, web aggregators have to explore different models. I personally think IRDA is doing them a favour and stopping what I think is a dead ended model anyhow (lead-gen)

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.