Life Insurance Commission

Life insurance policies follow a front loaded commission structure where a fat chunk of the first-year premium is paid to the agents upfront as a commission. The Insurance Regulatory and Development Authority of India (Irdai) has retained the structure in its recent notification. The rules also allow for an extra 20% of the commission in the first year in the name of rewards. Here’s what experts had to say on whether front-end commission structure should continue for the industry:

SANKET KAWATKAR
Principal and consulting actuary, life insurance (India), Milliman India Pvt. Ltd

It is important for the agents to get a higher commission in the initial years because it is not easy to sell life insurance. But for corporate agents, a less skewed commission structure may be possible given the ability of the companies to sustain for longer periods without making profits. Indeed, in some other markets, there are structures available, wherein a distributor’s compensation is linked to the assets under management generated by him. Having said this, the issues arising due to skewed commission pay-outs can’t be ignored. High up-front commission is often cited as a reason for mis-selling, churning of business and low persistency—none of which is in the best interest of the policyholders. But to address these issues, one may need to adopt other measures such as strict recruitment and training standards to attract only professionals. The current practice has been to pay (rewards and prizes) more than the base commission. To that extent, the new regulations may only help ‘regularise’ some of the existing practices. But, unless Irdai strengthens its inspection and penalty mechanism, such practices can’t be entirely stopped.

DEEPAK MITTAL 
Managing director and chief executive officer, Edelweiss Tokio Life Insurance Co. Ltd

Across the globe, life insurance, unlike other financial instruments, remains a high advisory business with the objective of providing long-term protection for customers. This advisory requires significant effort and expertise and thus needs appropriate compensation.

The commission structure, as in the latest regulations, recognises the same and also incentivises for selling longer duration policies and term policies. Moreover, the overall cap on expenses ensures that the providers operate within overall expense limits and prevents excessive spending at the cost of policyholder.

But there should be a higher onus on advisers ensuring that the customer gets the right advice and receives continuous service, so that they stay invested for longer as upfront costs when amortized over longer period are quite reasonable. Over the past 6 years, the industry has seen significant improvement in customer value proposition. As long as the quality of advice is commensurate with remuneration and customers get solutions and services as envisaged, this is appropriate for the current stage of the insurance industry.

P. NANDAGOPAL 
Founder and chief executive officer, OpenWorld Insurance Broking Ltd

Problems with commissions on insurance product sale are three fold. First, how much ever you may pay as commission, it’s still difficult to sell insurance. Second, every rupee you pay as commission, reduces the customer benefits proportionately and further enhances their resentment towards the poor value proposition of insurance. Third, those who have better bargaining power and leverage with insurers get away with higher commissions.

The recent change in insurance agency commissions may not change the picture for better. The best way to address this issue is to mandatorily restrict customer charges and free the commission restrictions to let the market decide on which company should pay what to its distributors.

Regulations should focus on customer protection and ensure customer is not fleeced in the name of high-end distribution fees. Regulations do not stipulate what should be paid as salaries to employees or rent for the office premises or on marketing spends. There should be mandatory cap on what should be passed on to the customer and anything above this, should be borne by the capital of the shareholders.

PANKAJ MATHPAL
Managing director, Optima Money Managers Pvt. Ltd

Commissions are the reason a sales person pushes to sell a product. Since an agent incurs the cost of acquisition as well as services the client, upfront and renewal commission both are justified, as long as they are reasonable. But for life insurance, high commissions, compared to other financial products, is a reason for misselling. Also, since these commissions are linked to the amount of premium paid, agents try to sell bundled products with higher premiums compared to term insurance plans. Term insurance plans are ideal ones as these offer higher sum assured with lesser premium.

An agent gets renewal commission on the policy sold by him throughout the premium paying term of the policy irrespective of whether he services the client or not, and if a life insurance agent survives in the business for a number of years, he continues getting commission on the policy sold by him even if he quits the agency business. So, agents should be moved to level commission as is the case with other financial products.

The renewal commission should be paid to the agent who services the client and not the one who just sold the policy.