15 Sept 2009
The way life insurance policies are sold in India may change forever following a recommendation by the Insurance Regulatory and Development Authority of India, or Irda, to scrap agent commissions that customers have to pay even when they buy insurance directly from companies, either online or by walking into an insurance company office.
A senior Irda official told Mint that customers who buy policies directly from life insurance firms should not be charged such commission.
This game-changing recommendation follows two similar investor-friendly moves in the past few weeks. The Securities and Exchange Board of India, or Sebi, discontinued distribu
tor commissions in the mutual fund industry after August. A committee headed by pension regulator D. Swarup has recommended that all upfront commissions paid to distributors of financial products should be scrapped by April 2011.
The average commission, according to Irda's latest annual report, is 16.25% but can go as high as 40% in some plans such as unit-linked insurance products, or Ulips, and endowment plans.
The move to abolish agent commissions for direct applications will ensure that the entire premium paid by investors is put to work, thus increasing total returns on the investment.
"Irda recommended in July that following the amendment of the Insurance Act, the regulator must get the power to make it mandatory for life insurance companies not to charge agent's commission to a customer who buys a policy directly," said the Irda official, who did not want to be named.
"There is a clear case that customers who apply directly to buy a policy should not be charged the same way as others who come through agents.
Lowering the charges for direct customers will also ensure a healthy relationship between the customers and their insurance companies," said R. Kannan, member (actuary), Irda.
"The matter is before Parliament at the moment."
This is one of the proposals made by Irda in a draft Bill in the Rajya Sabha, the upper house of Parliament.
Irda chairman J. Hari Narayan said, "Indeed, such a suggestion has been made in the draft proposal. In fact the proposal also talks about conferring power to the regulator to determine the commission structure for intermediaries."
At present, a section of the Insurance Act prevents any rebate on commission charges or on premium paid by customers either directly or indirectly.
Even though removal of commission is different from rebating, Irda has recommended changes in this section to ensure no agent commission for direct sales.
The development assumes significance in the context of the draft recommendations of a six-member committee headed by Swarup, chairman, Pension Fund Regulatory and Development Authority, early this month. In a bid to curb mis-selling of all financial products, the panel has proposed a phased elimination of upfront commissions paid to the agents by April 2011.
The committee has recommended that the upfront commissions included in the premium paid should be reduced to 15% of the premium immediately from the current commission of up to 40%. In 2010, this should be brought down to 7% and a zero-commission structure should be ready by April 2011.
"The interim period should be used by insurance companies to help their agents make the transition to a more mature way of selling and advising," the Swarup committee consultation paper said.
Investments in Ulips involve several charges such as an initial administration charge or premium allocation charge, a regular administration charge, a policy administration fee and an investment management charge. Collectively these charges may eat up to 70% of the premium paid in the first year, including up to 40% of the premium as agent's commission.
Even in the case of direct applications, the charges remain the same. This means, if a customer pays a premium of Rs1 lakh in the first year, about Rs40,000 of this is deducted as agent's commission. From the second year onwards, the charges can be in the range of 5-10%. At least a few firms, including ICICI Prudential Life Insurance Co. Ltd and Max New York Life Insurance Co.
Ltd, have started offering certain policies that levy lower commission if a customer buys the product directly. Bajaj Allianz Life Insurance Co. Ltd too recently launched a product where customers can have the benefit of lower premium allocation charges when they buy online, said Kamesh Goyal, CEO, Bajaj Allianz. "The objective is to make available products suited for various channels and the customer then decides which channel they prefer to buy from."
Alpesh Shah, partner and director of consultancy firm Boston Consulting Group, said the cost of distribution, around 15-20% on average, is very high and there definitely is scope to bring it down.
At the same time, he pointed out that a pure insurance product is difficult to sell, being a "push product". But investment products wrapped with insurance are relatively easier to sell. According to S.B. Mathur, secretary general of Life Insurance Council, the representative body of all life insurers in India, the proposed changes will empower customers. He pointed out that since agents bring a lot of value to a product sale by ensuring lower risk of lapses, the know-your-customer norm has to be strengthened by insurers if the commission is removed.
Puneet Nanda, executive vice-president of ICICI Prudential Life Insurance, said theoretically, it was a good proposal but may be difficult to implement. "This is because agents play a crucial role in ensuring quality sales. Insurance is a complex subject and agents play a vital role in educating customers before selling a policy."
Mathur does not see any immediate impact on business as only a "small portion of sales comes from direct applications".
India has 22 life insurance companies, including staterun Life Insurance Corp. of India Ltd, the country's biggest.
The largest private sector life insurer in India collected a total premium of Rs15,356 crore in the last fiscal.
In the June quarter, total premium for the industry grew 11.11% to Rs47,169 crore from Rs42,452 crore a year earlier, according to data provided by Life Insurance Council.
In July, Irda capped fees that insurers could charge Ulip customers, following which some of the firms may have to cut commissions they pay to agents to control costs.
The objective behind Irda's move is to encourage longterm business and enable policyholders to earn additional returns. The new norms are effective 1 October.
A recent report from Mumbai-based brokerage Edelweiss Securities Ltd said significant cuts in commission rates are required to maintain profitability.
The Edelweiss report said: "As per our estimates, for a typical back-loaded policy, the difference between gross and net yields to the policyholder ranges between 2.1% and 4%.
This difference is likely to be higher for high-charge, frontloaded policies (4-4.5%)."
As per the new guidelines, insurers will have to reduce this difference to the prescribed range, resulting in lower revenue generation on new business written, in turn raising dependence on capacity utilization and persistency to generate profitability.
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