LIC's sops for agents could price out smaller life insurance companies

When the finance ministry in September announced improving benefits for agents employed by state-owned Life Insurance Corporation (LIC), the industry was thrown a curveball.

The new benefits incentivise 1.35 million agents to continue with LIC, India’s largest life insurer, but raise the heat on smaller firms in an expanding but difficult business. Some such firms could throw in the towel and seek merger with larger counterparts. LIC’s annual report for Financial Year 2023 (FY23) shows it paid agents Rs 25,580.39 crore as commission and other benefits. LIC’s bill for the new benefits is not available.

The Insurance Regulatory and Development Authority of India (IRDAI) reined in management expenses of companies so that there is more money on the table, as returns, for people buying insurance. But in August, a month before the ministry’s announcement, the regulator eased the rules for such expenses.

IRDAI moved away from rules that set expense limits for each line of the insurance business but made work cumbersome for companies. Its revised rules are meant to create competition among companies and have been received well. The change was particularly needed by smaller life insurance companies which often spend much more as management expenses when selling products. Life insurers Bharati, Edelweiss and Aegon’s management expenses are above the industry average, making them potentially uncompetitive in the industry. (See table of companies with market share of 1 per cent or less)

 

What is management expense?

For life insurance, Irdai defines it as “all expenses in the nature of operating expenses including commission, remuneration/brokerage, rewards to the insurance agents, intermediaries and insurance intermediaries and commission on reinsurance inward which are charged to the Revenue Account”.

Of the Rs 1.07 trillion the life sector spent as management expenses in FY22, a third was for agents' commission.

An insurance product is sold by solicitation and companies deploy agents for the job. As India’s per capita income is low compared to other large Asian countries, agents play a key role in bulking up business volumes.

LIC has the largest army of insurance agents (1.3 million) and private firms have 1.1 million. LIC agents account for more than 96 per cent of the new business generated by the company annually. For the private life insurance companies, banks generate the most business (54.79 per cent) through the so-called bancassurance channels.

LIC, which has almost two thirds of life insurance business, is the poaching ground for all other companies hiring agents by offering a better commission package

The finance ministry has offered a package of three sops for LIC agents:

Increasing gratuity from Rs 3 lakh to Rs 5 lakh.

Allowing reappointed agents to be eligible for policy renewal commission.

Expanding term insurance cover for agents from the existing range of Rs 3,000-10,000 to Rs 25,000-1,50,000. This enhancement in term insurance will significantly benefit the families of deceased agents, offering them a more substantial welfare benefit.

LIC’s sops won’t put cash in hand and it has the finance ministry’s backing to carry them through. Other insurance companies, including those owned by state-run banks like SBI Life and Canara-HSBC, don’t offer gratuity to agents but commission linked to performance.

Agents at large

Companies will reward their more productive agents better and IRDAI’s liberalised rules will help them. About the new terms for management expenses, the regulator issued a clarification saying companies must have reasonable expectation from their agents and not force them. “Insurers shall ensure their commission structure is commensurate with the efforts required to acquire and sustain that type of business. This means intermediaries shall be compensated fairly for their work, regardless of their size or bargaining power,” it said.

Earlier this year, HDFC Life said in an investor presentation that it will have “data-driven intermediary recruitment”. These agents shall be costly. The company has not offered numbers, but sources said India’s third largest life insurer will spend more than Rs 250 crore to bring in technology-enabled agency forces. The company’s information expenditure technology increased by 40 percent in the year ended March 2023, much higher than the 15-30 percent growth rate recorded over the past four years.

Other companies too are improving their technology to sell insurance. SBI Life Insurance has a metaverse project called ‘LifeVerse Studio” to connect with young internet users. Aditya Birla Sun Life Insurance has said it is merging traditional underwriting principles with advanced algorithms, to “empower insurers to make informed and efficient underwriting decisions, resulting in expedited policy issuance”.

Smaller companies tried to survive by selling group insurance policies or bespoke covers like single premium. Some tried to make up for their deficit of feet on the ground by enlarging the numbers of bancassurance partners. Last year, IRDAI allowed companies to rope in more bank partners.

The insurance industry is moving to bring in more agents. At an industry event earlier this year held by BNP Paribas, five companies, HDFC Life, ICICI Pru Life, Max life, ICICI Lombard and Star Health, all agreed that agency forces were critical to expand their business.

These companies shall recruit their own agents. IRDAI’s annual report last year said that individual agents continue to be the main method for procuring new business. New business premium procured by them was 55.01 per cent for FY22.

As the cost of recruiting new agents goes up, smaller insurance companies' costs will rise. A LIC agent courted by another company will demand similar benefits. No official at any insurance company was willing to come on quote on the finance ministry move.

More than anything else, agent compensation will potentially drive up costs for life insurance companies and set the stage for a fresh round of mergers and acquisition.