Irda panel to link commission to service

Changes in commission structure aimed at ensuring proper customer service and reduction in policy lapse ratio.

The practice of life insurance agents enjoying a bulk of the commission in the first year itself could come to an end.

A committee appointed by Insurance Regulatory and Development Authority of India (Irda) is likely to recommend that the commission structure of life insurance agents be linked to the service provided to policyholders and commission payment be phased over a longer timeframe, with most of it payable in subsequent years.

The 10-member committee, set up in September 2007 to examine various distribution channels including the commission structure, is expected to submit its report on December 31, 2007. The commission is likely to be slashed in the first year and increased in the subsequent years. Changes in the commission structure are meant to ensure proper service to the policyholders and reduction in the policy lapse ratio. 
 

LYING DORMANT Lapsed policies in  2005-06*
Insurer	Number In '000	Sum assured Rs crore
Bajaj Allianz	66.47	2,417.74
Reliance Life	17.58	259.80
Aviva	18.60	48.99
Birla Sun	5.26	359.97
HDFC Standard	40.55	793.56
ICICI Pru	136.54	1,377.46
ING Vysya	40.73	855.40
LIC	9,568.88	61,640.00
Max New York	104.02	2,657.78
Met Life	31.12	1,008.37
Kotak Life	27.07	520.55
SBI Life	31.52	459.43

"The Govardhan committee will suggest the norms for training of distribution channels and the commission structure. Currently, banks and agents have the same compensation structure. To bring down the high lapsation rate and ensure good service to the customer, the committee is likely to suggest that compensation be linked to these two aspects," said K Subrahmanyam, executive director of Irda at a seminar on bancassurance organised by Max New York Life.

Insurance agents earn a commission of up to 40 per cent in the first year of the policy. However, several of them do not provide prompt and effective service, such as collection of subsequent premium, to the policyholders.

The committee may recommend slashing the commission of the intermediaries in the first year of the policy to address these issues.

At present, there are a wide range of intermediaries for distribution of insurance products such as traditional tied individual agents, corporate agent, micro-insurance agent, the bancassurance mode and the referral system.

"Lapsation is high as 60 per cent in the first year for some companies and in any case is not less than 15 per cent. The commission decreases in the second and third year to 7.5 per cent. Also it is as low as 7.5 per cent for annuity products and 2 per cent for single premium products," added Subrahmanyam.

However, the change in the compensation structure for intermediaries will require an amendment to the Insurance Act.

According to the note on the website on formation of the committee, Irda had said, "Several insurers have also adopted other channels of sales to suit e-selling such as computer points at convenient locations and on-line insurance purchase. These systems have been in place for some time now, some of them for the last eight years. Some of the practices that have crept into the system such as remuneration or reimbursement of expenses and incentive schemes require a detailed examination to ascertain their conformity with the provisions of the Insurance Act and impact on the acquisition cost."