Mumbai: 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.
Consumer first: Irda chairman J. Hari Narayan. Bharath Sai/Mint
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 distributor 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.
Direct benefit: Max New York Life has started offering certain policies that levy lower commission if a customer buys the product directly. Ramesh Pathania / Mint
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.