Mumbai: In a game-changing move, the Insurance Regulatory and Development Authority (Irda) is ready to cut commissions charged by banks for selling insurance policies to customers through their branches.
Currently, all distribution channels—agents as well as bank branches—charge uniform commissions, up to 40% of the first year’s premium in many policies. The new differential commission structure will come as a big relief for customers as they will have to pay much less when they are buying policies from the bancassurance channel.
Bancassurance is a term used to describe the sale of insurance policies through the branch networks of banks which life insurance companies have tied up with.
“The banking channel should charge much lower commission than the agency distribution channel as the banks have already incurred all costs required to facilitate insurance sales,” an Irda official said, on condition of anonymity. “We could see lower commissions and a ceiling on charges in bancassurance by March,” he added.
Section 40 of the Insurance Act does not allow a distributor to offer rebates to or charge more from any policyholder. To pave the path for a differential commission structure, this section will be removed from the Act and brought under Irda’s regulations.
The insurance regulator had moved the law ministry in October with this proposal and hopes to get the government nod very soon.
“We are examining whether the commission structures in bancassurance could be lowered and capped. It will be possible only after the specific section of the Act governing commissions and rebates is brought under Irda’s regulations,” Irda chairman J. Harinarayan told Mint on Tuesday.
While the move will offer relief to insurance policy buyers, banks may lose enthusiasm to sell policies. Though the country’s largest life insurer Life Insurance Corp. of India (LIC) may stay largely insulated from the move as most of its sales come from its nationwide network of agents, private life insurers, which depend more on bancassurance, may suffer.
There are 23 life insurance companies. In 2008-09, around Rs6,051.55 crore, or 21%, of the total new business premium of private sector life insurers came from bancassurance.
Rama Prasad Bhattacharya, senior manager, marketing and bancassurance, United Bank of India, which has a bancassurance tie-up with Tata AIG Life Insurance Co. Ltd said, “We expect our earnings to come down after the recent cap on charges in unit-linked insurance products. Further reduction in commission will hurt. Though it is a good move for customers, there must be some incentive left for the people who are serving customers.”
Anupam Dey, product manager-bancassurance, DBS Bank Ltd, said there could be a rationalization of charges and “banks will have to live with it”.
According to Irda’s latest annual report, around Rs1,181.22 crore, or 48%, of the new business premium of HDFC Standard Life Insurance Co. Ltd in 2008-09 came from bancassurance.
Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd and Star Union Dai-ichi Life Insurance Co. Ltd saw all their new business premium coming through bancassurance.
Harpal Karlcut, CEO, Canara HSBC, said: “It’s critical to have a data on the costs that a bank incurs for selling insurance policies and servicing the customers. Banks that are building separate distribution centres for selling insurance will be impacted if the proposal comes through.”
Bancassurance’s contribution to the new business of IDBI Fortis Life Insurance Co. Ltd was at least 75% and that of MetLife India Insurance Co. Ltd 61%.
According to S.B. Mathur, secretary general of Life Insurance Council, an industry lobby, the move may help banking channel to become more popular in the coming days. “Agency channel puts in a lot more effort to sell a policy than bancassurance and thus the commission structures should be different. If the benefits of lower distribution charges are passed on to customers, the bancassurance channel will pick up,” added Mathur.
Going by the Life Insurance Council data, LIC collected premiums worth Rs30,471.11 crore from new customers in the first seven months of fiscal 2010 to October, while the industry collected new business premiums worth Rs46,551 crore during the same period, recording an 18% growth over the corresponding period last year. The industry now has close to Rs10 trillion in assets.
While banks will have to work for lower commissions when Irda implements the proposal, on the positive side, they will be able to sell policies of more than one insurer if the insurance regulator has its way.
Currently, banks cannot sell policies of more than one insurer but Irda proposes to change this and allow banks to sell policies of multiple insurers.
This may push up business volumes and compensate for the cut in commissions.
But private life insurers who have been trimming their agency distribution channel to cut costs and increasingly using the bancassurance network may have to change their strategy.
In October, the regulator called for details of all bancassurance business from insurers. Irda said it has been receiving a number of representations regarding the structure of payments of commission to the banks acting as corporate agents. “The issue needs detailed examination to ascertain sustainability of the business through bancassurance channel and its impact on the insurers and the policyholders,” it had said.
Internationally, many countries have already adopted the practice of charging lower commissions for policies sold through the bancassurance channel.