 "Irda to revise agents' commission norms")
The Insurance Laws (Amendment) Ordinance, which has suggested structural changes in the way the sector functions, has omitted Section 40A of the earlier Insurance Act, which talks about commission to insurance agents. So, the Insurance Regulatory and Development Authority of India (Irdai) is currently working on a revised commission structure.
Under Section 40A of the earlier Act, no insurance agent would get a commission exceeding seven and a half per cent of the first year's premium, and two per cent of each renewal premium payable on the policy, where the latter grants a deferred annuity in consideration or more than one premium.
Rajeev Kumar, chief and appointed actuary at Bharti AXA Life Insurance, said it had been proposed to Irdai that there be a balance between the first-year and second-year commissions. “This will motivate the agent to persuade the customer to keep paying the premiums even in the second year, where the cases of lapsation are high,” he said.
There has also been talk about a fixed salary structure for agents, to retain them longer. The need has been suggested at several forums, said a senior executive in a private life insurance firm, but a consensus had not been arrived at.
“While further details are awaited on how the commissions would be structured after 40A was omitted, some re-framing of the guidelines would be done," he said. There are also proposals on having a commission expense cap, rather than a fixed percentage of commissions.
First-year commissions for life insurance premium are the highest, which then taper from the second and third year onwards. Hence, the bulk of first-year premiums in a policy go towards commissions. Tarun Chugh, managing director and chief operating officer, PNB MetLife said it appears Irdai would frame regulations hopefully allowing a lot more flexibility for companies to design performance-based remuneration models, suiting each channel within an overall expense cap.
“This is likely to help Insurers increase productivity of its channels further which will result in the overall increase of Insurance Penetration in the country,” he said.
Most insurance executives agree that there is a need to have a more balanced approach towards commission structures, so that they are not skewed towards the first year. Fixed salary structure doesn’t seem to have too many takers.
The chief distribution officer at a mid-size private life insurer said that with large public and private life insurance companies having a large agency-force, fixed salary can set them back by a huge expense. They would, then, have to drastically reduce the number of agents, affecting the overall business, he added.
During 2013-14, the life insurance sector reported an increase in the expenses of management in proportion to the rise in gross premium collected. Commission expenses as a percentage of premiums decreased marginally to 6.63 per cent from 6.71 per cent in 2012-13. While commission expenses rose in the case of regular premium and renewal premium, there has been a fall in the commission paid towards single-premium products.
According to Irda’s Annual Report for 2013-14, individual agents’ contribution to new business premium went up slightly to 78.40 per cent during 2013-14 from 77.53 per cent in 2012-13. The Life Insurance Corporation of India had procured 95.99 per cent of its individual new business premium through agents, while for private insurers, the share of individual agents was 40.09 per cent.
Under Section 40A of the earlier Act, no insurance agent would get a commission exceeding seven and a half per cent of the first year's premium, and two per cent of each renewal premium payable on the policy, where the latter grants a deferred annuity in consideration or more than one premium.
Rajeev Kumar, chief and appointed actuary at Bharti AXA Life Insurance, said it had been proposed to Irdai that there be a balance between the first-year and second-year commissions. “This will motivate the agent to persuade the customer to keep paying the premiums even in the second year, where the cases of lapsation are high,” he said.
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Under the traditional product guidelines in force since January 1, 2014, commissions are linked to the tenure of a policy. The higher the duration, the higher is the commission. Irdai has said commission rates for policies with longer tenure would be higher than those for short-term policies. For policies with tenures of at least 12 years, the commissions would be 35 per cent of the premium.
There has also been talk about a fixed salary structure for agents, to retain them longer. The need has been suggested at several forums, said a senior executive in a private life insurance firm, but a consensus had not been arrived at.
“While further details are awaited on how the commissions would be structured after 40A was omitted, some re-framing of the guidelines would be done," he said. There are also proposals on having a commission expense cap, rather than a fixed percentage of commissions.
First-year commissions for life insurance premium are the highest, which then taper from the second and third year onwards. Hence, the bulk of first-year premiums in a policy go towards commissions. Tarun Chugh, managing director and chief operating officer, PNB MetLife said it appears Irdai would frame regulations hopefully allowing a lot more flexibility for companies to design performance-based remuneration models, suiting each channel within an overall expense cap.
“This is likely to help Insurers increase productivity of its channels further which will result in the overall increase of Insurance Penetration in the country,” he said.
Most insurance executives agree that there is a need to have a more balanced approach towards commission structures, so that they are not skewed towards the first year. Fixed salary structure doesn’t seem to have too many takers.
The chief distribution officer at a mid-size private life insurer said that with large public and private life insurance companies having a large agency-force, fixed salary can set them back by a huge expense. They would, then, have to drastically reduce the number of agents, affecting the overall business, he added.
During 2013-14, the life insurance sector reported an increase in the expenses of management in proportion to the rise in gross premium collected. Commission expenses as a percentage of premiums decreased marginally to 6.63 per cent from 6.71 per cent in 2012-13. While commission expenses rose in the case of regular premium and renewal premium, there has been a fall in the commission paid towards single-premium products.
According to Irda’s Annual Report for 2013-14, individual agents’ contribution to new business premium went up slightly to 78.40 per cent during 2013-14 from 77.53 per cent in 2012-13. The Life Insurance Corporation of India had procured 95.99 per cent of its individual new business premium through agents, while for private insurers, the share of individual agents was 40.09 per cent.