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The Insurance Laws (Amendment) Ordinance that has made structural changes in the way the insurance industry functions has omitted Section 40A of the erstwhile act. This has sent the insurance regulator to work on a revised commission structure where the existing norms would be revisited.
As per Section 40A of the earlier Insurance Act which pertained to limitation of expenditure on commission, no insurance agent would get a commission exceeding 7.5% of the first year's premium, and 2% of each renewal premium payable on the policy, where the policy grants a deferred annuity in consideration or more than one premium.
In cases where the policy grants an immediate annuity or a deferred annuity in consideration of a single premium, or where only one premium is payable on the policy, it could not exceed 2% of that premium. In any other case, it could not exceed 35% of the first year's premium, seven and a 0.5% of the second and third year's renewal premium, and thereafter 5% of each renewal premium payable on the policy.
Provided that in other case referred above, an insurer, during the first ten years of his business could pay to an insurance agent and an insurance agent may receive from such an insurer, 40% of the first year's premium payable on the policy.
Rajeev Kumar, chief and appointed actuary at Bharti AXA Life Insurance explained that in cases of savings policies, it has been proposed to Insurance Regulatory and Development Authority of India (IRDAI) that there should 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.
The traditional product guidelines that were implemented from January 1, 2014 had linked commissions to tenure of a policy. Higher the duration, higher is the commission. Irda 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% of the premium.
There also have been talks about having a fixed salary structure for agents, in order to retain them for a longer duration. A senior executive in a private life insurance firm looking at agency force explained that while at several forums, the need to have fixed salaries for agents has been suggested, 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.
The first year commissions for a life insurance premium are the highest which then taper from the second and third year onwards. Hence, a bulk of the first year premiums in a policy go towards paying commissions. Insurance executives said that there is a need to have a more balanced approach towards commission structures so that they are not skewed towards the first year and also motivate the agent to go out and get renewal premiums from the second year onwards.
For a customer too, if the commission structures are revised, the premiums will also be revised. more balanced commission structure between the first and second year of the premium-paying term would mean that the first year premiums would be slightly revised downwards.
A fixed structure is not something everyone is in favour of. The chief distribution officer at a mid-size private life insurer explained that with large public and private life insurance companies having a large agency-force, a fixed salary structure can set them back by a huge expense. He added that they would then have to drastically reduce the number of agents, affecting overall business.
During 2013-14, the life insurance industry reported an increase in expenses of management in proportion to increase in gross premium collected. The commission expenses ratio (commission expenses as a percentage of premiums) decreased marginally to 6.63% from 6.71% in 2012-13. Overall, while the commission expenses increased in the case of regular premium and renewal premium, there has been a fall in the commission paid towards single premium products.
According to IRDAI Annual Report for 2013-14, the contribution of individual agents to the individual new business premium has gone up slightly to 78.40% during 2013-14 compared to that of 2012-13 (77.53%). Life Insurance Corporation of India (LIC) had procured 95.99% of its individual new business premium through individual agents while for the private sector the share of individual agents was 40.09%.
