Mumbai: India’s insurance regulator, Insurance Regulatory and Development Authority (Irda) has written to the finance ministry, objecting to a government-appointed panel’s proposal that wants agents’ commissions removed from policyholders’ premiums. If the government sees merit in Irda’s argument, 3 million life insurance agents in the country will heave a sigh of relief.
Dissenting voice: Irda chairman J. Hari Narayan says the insurance regulator has written to the finance ministry, opposing the proposal to remove the agents’ commission from policyholders’ premiums. Bharath Sai / Mint
“We have protested the Swarup committee’s proposal to remove commission from the premium,” Irda chairman J. Hari Narayan said on Thursday, confirming the development. “We have written to the ministry.”
The mandate of the six-member committee headed by D. Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), was to suggest measures to protect and educate investors. One of the key recommendations in the consultation paper released by the committee in early September was the elimination of upfront commissions paid to life insurance agents by April 2011.
Swarup said the panel was meant to represent customers. “The remit of the committee is the consumer’s side of the equation. Therefore, we are focusing on that.”
The committee includes representatives from the Securities and Exchange Board of India, or Sebi, the Reserve Bank of India, Irda, PFRDA, and the finance and corporate affairs ministries. The recommendation on commissions is one of a total of 33 made by the panel.
The Insurance Act currently allows agent commissions of up to 40% in the first year for some life insurance products. In the second and third years, the firms can pay commissions of up to 7.5%, and a maximum of 5% thereafter.
Life insurance agents in India earned Rs15,000 crore in commissions last year, according to the panel’s report.
In defence of the commissions, R. Kannan, member (actuary), Irda, said agents play an important role in the insurance sector and one of the reasons behind non-life insurance penetration stagnating at 0.6% of population could be low level of such incentives.
Life insurance penetration in India increased from 1.77% in 2000 to 4.1% in 2006, before declining to 4% in 2007, a survey tabled in Parliament in July by finance minister Pranab Mukherjee shows.
India’s life insurance industry collected annual premiums of Rs2.23 trillion in 2008-09 through the sale of new policies and renewals.
The current system of sales incentives encourages insurance agents to tailor advice in such a way that it promotes the interests of the industry rather than the insurance buyer, Swarup said in the paper.
The Life Insurance Council, a representative body of life insurers in India, has written to Irda against the Swarup committee’s recommendation on the removal of commissions.
“The recommendation will not work in a retail-based industry like life insurance,” said S.B. Mathur, the council’s secretary general. “Irda should discuss the matter with the pension regulator.” According to him, at least 80% of sales in the life insurance industry comes from agents.
A senior official at a large life insurance firm sees merit in Mathur’s argument.
“Mr Swarup’s recommendations are simply not practical,” the official said on condition of anonymity as he did not want to be quoted on regulatory issues. “Whatever penetration we have in life (insurance) industry today is because of the huge agency force. Adopting the committee’s recommendations will hamper the growth.”
The recommendations can be adopted if the insurers agree to incentivize the agents by matching the commissions paid to them by the customers, but such a move will increase the expenses of the insurers and impact their profitability, the official added.
Some insurers, such as ICICI Prudential Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd expect to break even in the next two-three years, but if the commissions are removed from customers’ premiums and transferred to the expense books of insurers, they will take longer to break even.
“I haven’t come across any part of the world where you do not have agents when it comes to insurance products,” said Irda’s Kannan. “We should not bring any measure which could jeopardize this industry.”
Mint had reported last month that the regulator has proposed the scrapping of agent commissions from premiums for policies sold directly. Currently, customers have to pay agent commissions even when they buy insurance directly from companies, either online or by walking into an insurance company’s office.
The objective behind the move to abolish agent commissions for direct applications is to ensure that the entire premium paid by investors is put to work, increasing returns on investments.
This critical recommendation follows a similar investor-friendly move by the capital market regulator. Seb, discontinued distributor commissions in the mutual fund industry after August. Following this, the asset management companies, or AMCs, had to start incentivizing the agents and distributors to retain their interest in the business.
While investors benefit from the move, the profitability of AMCs will be affected. A recent study by McKinsey and Co. said AMCs will see profit erosion of up to 50% in FY10 due to the new Sebi rule. “The industry is likely to witness consolidation as smaller AMCs may not be able to accommodate the acute P&L (profit and loss) stress,” the report said.
anirudh.l@livemint.com
Sanjiv Shankaran contributed to this story.