Irda directive follows criticism over high levies.
Come July and you will be able to calculate the commission being paid to a broker or an agent hawking a unit-linked insurance plan, or Ulip.
Amid pressure on lowering the commission and fee paid to insurance companies and distributors, the Insurance Regulatory and Development Authority (Irda) today asked life insurers to explicitly provide the payment details in the benefit illustration declaration.
The mutual fund industry, which shifted to a zero-load structure last year, is complaining that the commission paid on Ulips, which are investment-cum-insurance plans, has resulted in agents and brokers pushing only these plans.
A committee headed by D Swarup, former chairman of the Pension Fund Regulatory and Development Authority, has recommended a shift to a structure where the buyer does not pay any commission. The move, though supported by Finance Minister Pranab Mukherjee recently, is being opposed by Irda and insurance companies.
The commissions on Ulips vary between 2 per cent and 35 per cent. In a recent order, the Securities and Exchange Board of India (Sebi) had said that the investment component in some Ulips is as high as 98 per cent, with only 2 per cent of the premium paid going towards insurance. The argument was used to suggest that the product was similar to a mutual fund scheme and insurers selling Ulips should register with the market regulator. Irda had opposed the proposal.
The mutual fund industry has also argued that the structure is so opaque that policyholders do not know the commission they were being paid. In a circular issued today, Irda said: “This (commission disclosure) will provide the prospective policyholder the exact amount of commission/brokerage, if any, payable and various charges to be collected from the policyholder.”
At present, insurance companies disclose commission paid under allocation charges. In addition, premium allocation charges include medical costs and other charges.
Company executives, however, said that the move was the result of the recommendation from the Life Insurance Council, an industry interest group.
“This step will bring in more transparency in Ulips and will dispel the notion of high commission from them. So far we were talking about policy allocation charges and policy administration charges,” said Reliance Life Managing Director & CEO Malay Ghosh.
“This is in line with what the Reserve bank of India has done with banks. It will effectively lead to transparency and investors will know how much commission is being paid out of the premium they pay,” said HDFC Standard Life Executive Director Paresh Parasnis.
Irda had responded to the criticism on Ulip charges by capping the charges levied. In addition, insurance companies have lowered the commission paid to agents to meet the new charge structure. Company executives said that the average commission in the first year had fallen from 15-20 per cent to 10-12 per cent. Similarly, the average commission on renewal premium has dropped to 1-3 per cent from 2-5 per cent earlier. Further, some companies have scrapped commission on renewal premium.
“Such disclosures will ensure transparency and the prospect can take informed decision. It is essential that investors are fully aware of the key components of the product pricing which includes mortality charges and the commission. We are maturing as an industry and this will further help establish insurance products as a viable long-term investment option,” said MetLife India Managing Director Rajesh Relan.
