Contrary to recommendations of various committees on rationalization of upfront commission structure of insurance agents to increase the persistency ratio, Nilesh Sathe, Member (Life), IRDAI has asserted that high first year commission has no relation with the renewal rate.
He was speaking at an insurance event held recently in Mumbai.
Sathe said that the IRDAI has found that Indian life insurers do not pay adequate commissions to their agents.
He further said that only a few agents get the entire 35% of the premium amount as the first year commission. Many agents end up getting only 10% of annual premium as the first year commission. In practice, they do not churn policies due to unattractive incentives, said Sathe.
A recent RBI committee report has recommended IRDAI uniformity between the first year commission (upfront) and renewal commission (trail) to improve the persistency ratio. 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.”
Another popular myth associated with insurance business is that insurance companies benefit from lapsation of insurance policies, said Sathe. “Lapsation of a policy does not benefit anyone. How could be it benefit them if insurance companies do not receive premium and agents stop getting renewal commission. IRDAI norms do not allow insurance companies to transfer the premium of lapsed policies to shareholders funds. It remains in the life insurance fund and distributed amongst those who regularly pay their premiums.”
On digitalization and e-commerce distribution of insurance, Sathe said that technology can never replace brick and mortar distribution channel. He said that agents are the backbone of the industry and nothing can replace them.
He said, “Four out of ten policyholders do research online but buy policies from their financial advisors. Though technology will help strengthen insurance distribution and increase penetration, people require handholding of advisors to make investment decisions,” he added.
