Cap on Ulip fees may hurt agent commissions

Cap on Ulip fees may hurt agent commissions

New Delhi: With the sector regulator capping fees that insurers could charge customers buying unit-linked insurance plans (Ulips), some of the firms may cut commissions they pay to agents to control costs.

“Commission rates will come down as charges may be reduced for small-ticket policies," said Gaurang Shah, managing director of Kotak Mahindra Old Mutual Life Insurance Ltd.

Ulips provide life cover and invest part of the premium in stocks and bonds. In most cases, the sum assured in the policy varies according to the value of its underlying assets.

The Insurance Regulatory and Development Authority (Irda) said in a circular last week that for policies of 10 years or less, the difference between gross and net yields to a policyholder should not exceed 300 basis points. A basis point is one-hundredth of a percentage point.

In other words, charges on Ulips should not exceed 3 percentage points of gross yields, of which fund management charges should not exceed 1.5 percentage pints.

For policies of more than 10 years, the charges should not exceed 2.25 percentage points of gross yields, of which fund management charges are capped at 1.25 percentage points.

A recent report from Mumbai-based brokerage Edelweiss Securities Ltd said significant cuts in commission rates are required to maintain profitability.

However, as a savings product, life insurance will remain a high commission product and, therefore, distributors’ preference is unlikely to change, it added.

“It (the ceiling on fees) will have a solid impact as currently there are products which are very expensive. In some of the products, commission rates may go down but companies are taking a call whether they should keep (existing) commission levels in exchange of volumes," said Sanjiv Bajaj, joint managing director with Bajaj Capital Ltd, a financial services provider. “Though new guidelines have curtailed our income to a large extent, we are looking at volumes to maintain profitability."

The Edelweiss report said: “As per our estimates, for a typical back-loaded policy, the difference between gross and net yields to the policyholder ranges between 2.1% and 4.0%. This difference is likely to be higher for high-charge, front-loaded policies (4-4.5%). As per the new guidelines, insurers will have to reduce this difference to prescribed range, resulting in lower revenue generation on new business written, in turn, raising dependence on capacity utilization and persistency to generate decent profitability."

“It is good for the industry as it will drive efficiency and the industry will be careful about costs," Shah said.

According to R. Kannan, member, actuary, Irda, currently no company pays a commission of more than 15%, while the regulator has allowed 40% of premium paid in the first year and 7.5% in the second and third years, followed by 5% in subsequent years. “Though it may hurt commission agents, nothing will change drastically."