The much awaited regulation on insurance distributor commissions is finally out. So, get ready to pay more to your insurance agent from April. For life insurance, other than new commission limits, extra payments to distributors in the form of rewards have also been formalised, taking the total distributor incentive higher than what it is.
Increase in commissions
The new rules have divided life plans into two segments: pure risk products (term plans) and policies that bundle investments. The first-year commission for a regular premium term plan is capped at 40%, and renewal commission at 10% each year through the premium payment term. Commission is calculated as a percentage of the premium and is embedded in what you pay.
Commission rates until now didn’t differentiate between a pure term plan and a bundled life insurance plan. They were dependent mainly on the premium payment term and the age of the insurer. So the maximum commission of 40% was allowed if the insurer was less than 10 years old and on products with a premium payment term of 12 years or more. For older insurers, the first commission was capped at 35%.
“Insurers have already started focussing on protection plans and these regulations only nudge the industry further,” said R.M. Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance Co. Ltd.
For bundled plans, the first-year commissions remain largely unchanged. Policies with a premium payment term of 5 years have a 15% upper limit whereas it is 35% for policies with a PPT? premium payment term of 12 years. The only change is that the new rules don’t allow higher commissions for younger companies. So, regardless of insurer’s age, the limit is 35%.
The big shift, however, has been the increase in renewal commissions. Till now, for agents this was up to 7.5% of premium in the second and third years, and 5% thereafter. But this will now be 7.5% every year, increasing the overall commissions. “This will encourage agents and intermediaries to service policyholders for the long term. It will also improve persistency and reduce lapsation rates,” added Vishakha.
The new rules have also brought the commission paid to brokers at par with agents. Insurance brokers are classified as insurance intermediaries, along with corporate agents, insurance marketing firms and web aggregators.
Insurers can now also pay extra to distributors through rewards. This effectively takes the first-year commission to 48% for term plans, and 42% for bundled plans with PPT of 12 years or more. A reward is an incentive given to distributors to clock in more sales, and is paid over and above the commission.
The fact that insurers pay extra to distributors even though rules prohibit it beyond the commission caps, is the worst kept secret of the industry. In fact, over-paying agents and intermediaries, especially banks, has been one of the main reasons why insurers have been fined in the past. “Extra payments were made to distributors through various avenues but these were getting attributed to the overall acquisition cost, making it difficult to track. But now the regulator has added a category and also capped it, which should make tracking easier,” said a senior executive of a life insurance company..
Rules now allow life insurers to offer a reward that’s not more than 20% of first-year commission. But it has also been made clear that entities that primarily focus on insurance distribution will be entitled for these rewards. “No reward shall be paid to an insurance intermediary whose revenue from other than insurance intermediation activities is more than 50% of its total revenue from all activities,” stated the circular.
This affects banks. “The regulatory push has been to revive the agency sales-force and cultivate a dedicated proprietory agency channel that’s performance driven,” said Sunil Sharma, appointed actuary, Kotak Mahindra Old Mutual Life Insurance Ltd. “Also, insurance business doesn’t form a large part of revenues for banks, so banks won’t be eligible for rewards. This is a significant step as the industry moves towards open architecture,” added Sharma.
However, this is not watertight yet. “In the case of public sector banks, there are typically no extra payments. But in private sector banks, the total payment goes as high at 80% even when the rules allow up to 35%. The extra payment is slipped through the acquisition cost, which, unless the regulator proactively tracks, may be difficult to control,” said a chief executive officer of an insurer who didn’t want to be named.
Mint Money take
In products, other than term plans, participating insurance cum investment plans may become popular. Given the cap on reduction in yield, there is limited scope to increase commissions in unit-linked insurance plans (Ulips), and non-participating bundled products have to manage long-term guarantees and the downward trend in the interest rates make them less attractive.
A positive effect of the regulations is that term plans will get a push. But the increase in commissions comes at a time when the financial sector is actively discussing policy changes to scale down commissions and insurers are under pressure to manage costs. Retaining high first-year commission may not yield the desired results.