With a view to improve persistency ratio, the RBI Committee headed by Dr. Tarun Ramadorai, Professor of Financial Economics, Imperial college London, has proposed rationalization of commission structure in life insurance. The committee has recommended uniformity between first year commission and renewal commission.
Currently, insurance intermediaries get up to 40% of annual premium as the first year commission on term life insurance policies and 35% of annual premium on traditional policies such as whole life insurance, endowment and money back policies. These intermediaries receive 7.5% of total premium as renewal commission or trail commission throughout the premium paying term.
As a result, a few insurance agents sell fresh policies every year due to higher first year commission. In fact, IRDAI data shows that the 13th month persistency ratio for the life insurance industry was at 61% in 2016. It reduces to just 28% in the fifth year. This indicates that almost 72% of life insurance policies do not last for five years.
In its recommendation, the committee said, “The current distribution incentives in the industry provide for high commissions for agents for initial product sales, but subsequently far lower commissions allowed for renewals of pre-existing policies. This set of financial incentives appears misaligned in the direction of skewing household outcomes towards initial take up of policies, and subsequent lapsation.”
The committee has also highlighted the fact that many households are unaware of the impact of lapsation on their future claims.
In April 2016, RBI had set up this committee to look at various facets of household finance in India and make recommendations to enable better participation of Indian households in financial markets.