It will reduce the incentive to mis-sell and to the extent that it reduces the wide disparity between the commissions on various financial products, it is a good move.
Dhirendra Kumar
Editor, valueresearchonline.com
‘High commissions induced agents to sell policies that consumers couldn’t afford - cutting these will now ensure healthier practices’
It is unfortunate that the proposed reduction in insurance commissions is being seen in terms of the consumer vs the insurance industry. This is a narrow view that comes from the position that the seller and the buyer must be enemies because they are both competing for the same rupee. In reality, the end of the present commission structure will mean a tremendous opportunity for the insurance business in India to reform itself. I see the reforms proposed by the Swarup Committee as the minimum that is needed to save India’s insurance business from its own excesses. The insurance industry must realise that there simply isn’t any other way forward. The business they are running now isn’t insurance. It simply amounts to letting loose hitmen who will do anything to trap victims if the bounty is large enough.
There is simply no justification for any kind of financial service to deduct the kind of commissions that insurance agents earn. The Insurance Regulatory and Development Authority (IRDA) has been making some noises against the high policy lapse rate recently. This lapse rate is an evidence of the vicious cycle that customers are trapped in. Since agents make a huge chunk of money upfront, they hard-sell high-commission products that require a higher premium than what customers can afford. The result is that the agent skims off his cream while the victim often misses his payments and loses massively.
While the Swarup Committee’s recommendations on reducing commissions are bang on target, what is really admirable is the clear-headed connection that its consultation paper makes between high commissions and the mis-selling of insurance. High commission rates are not an isolated problem. It’s not as if insurance holders are paying a high-entry cost for what is otherwise a great product. Instead, the front-loading of high commissions practically guarantees that customers will be sold products that are harmful to their financial health. And sooner or later, a good chunk of the customers will decide to cut their losses and abandon their policies. Mis-selling is built into the current business practices of the insurance industry.
It is sad to see that instead of mending its ways and turning over a new leaf, the insurance industry is trotting out the same ridiculous justifications for being allowed to continue these practices. We often hear that agents need high commissions because insurance is a long-term product. No one explains why every other product or service on this planet charges less from long-term customers while insurance agents need to charge more. No one also explains why this charge has to be so massively front-loaded instead of being smoothly spread out through the life of the policy.
Another favourite argument is how the money flowing in from insurance provides employment, boosts the stock markets, protects us from FIIs, etc. These sound like wonderfully patriotic goals but they can hardly justify what is being done to customers. As an insurance customer, why ahould large chunks of my money be handed over to agents so that stock traders can be protected from FIIs, whatever that means?
Anyhow, insurance is something that a huge number of Indians need desperately. These reforms, if they can get past the gauntlet of insurance lobbyists, will probably re-orient the industry to fulfil that need.
SB Mathur
Secretary General, Life Insurance Council
‘The bulk of insurance is sold at low-premium rates but the report has not taken this into account since it had already made up its mind’
The Pension Fund Regulatory Development Authority’s (PFRDA) attempt to ensure transparency is praiseworthy but the proposed architecture does not take into account the peculiarities of the life insurance business — adding another regulatory regime to the existing multiple regulatory regime won’t add value to the whole process.
Some of the data used is disjointed. It is mentioned that the industry paid Rs 14,500 crore as commission in 2008-09. What is, however, not mentioned is that the industry got a premium of over Rs 220,000 crores, or that this premium-to-commission ratio fell from 12.1 per cent at the time of opening up of the sector to 6.6 per cent, and all of this has been driven purely by competition, not by any fresh regulatory intervention.
The report says high upfront commissions of 40 per cent paid to agents leads to evils like mis-selling and churning, but its authors are not aware that 42 per cent of new premia (Rs 38,000 crore) was got under plans where the upfront commission ranged from 1.75 to 2 per cent with no trail commission to follow — this is lower than the charges of mutual funds for retail customers. IRDA data shows an amount of Rs 125,000 crore was collected with an upfront commission of under 2 per cent, but the working group ignored this since this never fitted its story of a 40 per cent upfront commission.
It is alleged that high commissions drive agents to do lot of mis-selling. The industry has around 30 crore policies in force (this is the highest in the world according to the IRDA annual report) and has accumulated an asset base of Rs 930,000 crore. Is it the report’s contention that all these are a result of mis-selling? Inspite of all the alleged mis-selling, the investing public has reposed faith in the industry and has bought 5 crore policies in each of the last two years.
Both mis-selling and churning result in a steep reduction in the renewal premium incomes. The report has some numbers on policies lapsing but it does not look at the high growth in renewal premium income. Renewal premium income has increased from Rs 26,250 crore at the time of liberalising the sector to Rs 156,000 crore in 2007-08 and Rs 220,000 crore in 2008-09.The much criticised unit-linked business has jumped from Rs 8,825 crore in 2006-07 to Rs 22,380 crore in 2007-08 and to over Rs 46,000 crore in 2008-09. All this suggests that selective data which supported the preconceived notions of the authors have found place in the report.
The report lays emphasis on investor education which is the main need of the hour and can address some of the issues in the sales process that are common to most products in the financial sector, without disturbing the existing structure which has stood the test of time. This will also take care of rural and social inclusion which has become the sole responsibility of life insurance sector with other players except banks concentrating on profitable business in metro and other major towns. Customers will benefit not by being burdened with the cost of another regulatory structure but by being better equipped to take informed financial decisions.
(The views are personal)
