New Delhi: India’s insurance regulator plans to alter the commission structure of agents to help life insurers cut costs, a top official said. The move could also benefit policyholders.
For both insurers and the insured, a large chunk of first-year premium goes towards writing off distribution costs such as agents’ commissions.
According to the guidelines of the Insurance Regulatory and Development Authority, or Irda, the commission depends on the type of insurance plan.
For single-premium products, the maximum commission rate is 2% of the premium paid, and for regular premium products, the rate is in the range of 15-30% of premium in the first year, followed by 5-7% in subsequent years.
“To cut costs of insurance companies, we are working on variation in the payment structure of agents. All the changes, such as paying commission to agents according to tenure of the policy, will be well within the scope of insurance laws,” said R. Kannan, a member (actuary) of Irda.
Irda usually requires the government to move amendments through Parliament for effecting changes in insurance law. In this case, a notification by the regulator would suffice.
Currently, Life Insurance Corp. of India, or LIC, the country’s biggest insurer by premiums, pays commissions based on the tenure of the policy. The move could make private insurers follow this payment structure.
“In LIC, we are paid commission ranging between 10% and 25% based on tenure of the policy ,” said P.B. Ramesh, a Mumbai-based LIC agent. “The step can give us a level playing field with other life insurance agents, who usually get higher commission compared with us in initial years.”
Commission rates linked to the tenure of the policy could also benefit policyholders, who would be able to invest more. Some existing policies have allocation charges that are as high as 60% of the premium. This means that out of every Rs100 paid, only Rs40 is invested in the first year of the policy.
“We can comment only after looking at the proposed structure. At this stage we do not know what they are planning,” U.S. Roy, managing director of SBI Life Insurance Co. Ltd, said about the proposed change in the commission structure.
Fresh business, or first-year premiums, in the insurance sector as a whole grew by 23.31% to Rs92,989 crore in 2007-08 from a year ago. In the two preceding fiscal years, business had grown even faster at 94.96% and 47.94%, respectively, according to a report by Irda.
“Currently, more than 70% of the industry’s business comes from agents,” said P. Nandagopal, president and chief executive of Reliance Life Insurance Co. Ltd. “Tenure-based commission will definitely benefit the industry. High commission will come down and there will be better reward for longer-term policies than the shorter-term ones.” But, he added, “with agents shifting from one job to another, implementation could become difficult”.