Rebating–An illegal practice - Views on News from Equitymaster

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Rebating–An illegal practice

Jul 11, 2001

For years insurance was sold on with the rebating carrot, where the agent would part with a part of his commission or pay the first premium for the customer. However, clients need to realise that rebating isn’t such a great thing after all. But first the legal standpoint. Rebating is a malpractice, it has been explicitly declared to be an illegal act according to the Insurance Regulatory Development Authority (IRDA). Section 41 of the Insurance Act, 1938 states

  • No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the premium shown on the policy, nor shall any person taking out or renewal or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.

  • Any person making default in complying with the provision of this section shall be punishable with fine, which may extend to five hundred rupees.

Professionals like chartered accountants, company secretaries and lawyers have all to follow a certain code of ethics, expecting them to keep in mind the interest of the client. On similar lines, IRDA regulated that the profession of an insurance agent should be carried out on similar ethical code, where the agent does not woo his customer by dangling the rebate carrot, but by providing him plans that suits his needs.

Turning down rebate works to the client’s benefit. Firstly the client gets a plan that meets his requirements instead of being ‘sold’ a plan that only gets the agent higher commissions. This ensures that the client gets a policy most apt for his security and retirement, incorporating other benefits, even if the policy does not fetch the agent with the kind of commission he would like to receive.

Another reason rebating isn’t such a great thing is that if the agent has paid the first year’s commission, it leaves the client feeling detached and there is no sense of ownership of the policy. There is a lull in the mind of the investor and when the next year’s premium has to be paid, he could default leading to lapsation of policy. Insurance instills a sense of discipline in the mind of the investor, but that is only if the client actually pays the commission, not his agent.

So the next time your agent offers you a rebate, you need to ask yourself if the rebate is really going to benefit you, or is it going to benefit him.

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