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Insurance IRDAI may do away with high upfront commission of life insurance agents

IRDAI may do away with high upfront commission of life insurance agents

IRDAI will look at levelling commission structure throughout the policy term to improve persistency.
Nishant Patnaik Jul 20, 2018

IRDAI has constituted a working committee headed by SP Chakraborty, GM, Actuarial, IRDA, to review the recommendations of the IRDAI committee that reviewed product regulations in life insurance and recommendations of Sumit Bose committee.

Earlier, the IRDAI committee has recommended that the industry can improve persistency ratio by levelling commission structure of distributors throughout the policy tenure. Simply put, the committee has recommended that instead of paying higher upfront payouts in the first year commissions, the industry should spread it over the years to ensure better renewal. This practice is already prevalent in non-life insurance and health insurance industry.

In 2017, IRDAI hiked the upfront commission and trail commission in selected segments and made the commission structure uniform across all intermediaries such as agents, brokers, corporate agents, insurance marketing firms and web aggregators. In fact, it has hiked the first year commission (upfront commission) in term insurance plans irrespective of term of the policy to 40% of annual premium. So far, the first year commission payouts under such policies have ranged between 20% and 35% of annual premium.

Among other key recommendations of IRDAI committee are rationalising high surrender value in traditional policies and disclosing performance of policies against benchmarks.

Other key areas which the committee is expected to review are:

  • Changes in needs and expectations of customers
  • Flexibility and innovations in product design
  • Probability of mis-selling and protection of policyholders
  • Suggesting innovative way to distribute insurance products
  • Reviewing the recommendations of the Sumit Bose committee report

Earlier in 2015, Sumit Bose had recommended continuation of upfront commission in traditional policies and ULIPs. However, such commissions were to be paid on mortality charges or the part of premium paid towards availing life cover. The committee had recommended that insurance companies should pay a fixed percentage of premium till the tenure of non-participating policies as renewal commission or trail commission. Participating policies, which distribute realized gains among policyholders, should pay trail commission based on assets under management.

Among other key recommendations of this committee are putting an end to the practice of paying advance commissions to distributors, passing back of commission to policyholders and using riskometer to depict risk level in ULIPs.

The nine-member IRDAI working committee is expected to submit its report by August 17, 2018, said IRDAI.

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13 Comments
Nagaraja K · 1 month ago
A good move. This was thought of long back. This will affect the agents as there will not be any money for rebating which is still prevalent in insurance companies. On the other hand, many agents leave because there is competition among the agents in rebating. The survival of the fittest is the norm. Many may not agree but it is a fact. One more thing that IRDAI should consider is that agents, with the required qualifications, should be allowed to canvass life and general insurance of all the companies instead of being tied to one company and as the commission will be same in all the companies there will be less chances of mis-selling.
SANJAY KULKARNI · 1 month ago
Along with Risk-O-Meter, Disclaimer on indicative returns should also be introduced.
Stany Dsouza · 1 month ago
This is possible only if LIC agreed. In insurance industry LIC of India is the boss and not IRDA.
Nagaraja K · 3 weeks ago
Well said. I second your thoughts. It is 100% true.
Reply
vinay · 1 month ago
But no Life Insurance company is giving 40% commission on term plans. When there is a circular to reduce payout companies applies it immediately, but circular asks to increase no company does it.
DB DESAI · 1 month ago
Agree with Mr. Nagaraja K. Further (1) Stop banks from selling insurance of any kind. (2) stop dealers from selling insurance of vehicles (3) Study the real reasons of misselling (4) Allow open architecture like MF so that genuine practitioners can give proper policy. (5) Create level playing field from taxation point of view in MF & Insurance. (5) Abolish difference in premium rates for Corporate, Bank, Dealers clients and clients of Individual Agents (6) Abolish difference in commission structure for Corporate, Bank, Dealers and individual agents. (7) Abolish difference in product features when sold by Corporate, Bank, Dealer and Individual Agent. Let all compete on the basis of merit, service and suitability of products.
Padmaja Bhat · 4 weeks ago
100% Agree with you
Reply
Kamal Garg · 1 month ago
I agree. High upfront commission distorts entire selling, marketing, educating and persuasive skill in the entire insurance process. High upfront commission compels the agent/distributor to part pass their commission to the client which actually blinds the client from taking a rational and educative decision. In fact, upfront commission should in no case be more than 10% and trail commission for the first five years not more than 5% and for later periods even less than 5%.
In fact, the entire process of insurance, including for motor vehicles and health, be open architecture, like, what is happening in case of MF industry where an investor can choose to go to the company/AMC directly and do the transaction. There is no need for any agent/distributor or any kind of intermediary. The insurance company should help the insured to fill up the form and give them proper advise. Currently, the advise given by the agent/distributor is often distorted based upon the commission which they receive by selling a particular type of policy rather than based upon the protection need of the insured.
samir das · 1 month ago
frequent changes in law is a great disadvantage for any country to create investment wave .since irda came into existence in 2001 everyday insurace laws are changing in our country as a result investors both nationally and internationally not looking our country as investment friendly. in the form of ulip plan crores of rupees are being looted from our customers and irda remains merely like watch dog. so consistency in laws and regulations plays a greate role for any industrial development . so far as high upfront commission are concerned we should know that distributors are not salaried people or institutions as a result against every sale there are minimum five canvas so who will take the cost of rest four canvas where sales were not made. therefore I think high upfront commission is a viable and scientific approach to keep the industry growing and if we think that high upfront commission is one of the main reason for rebating then we should know that even 50% rebating is working in postal scheme where commission rate maximum 1%.
samir das · 1 month ago
frequent changes in law is a great disadvantage for any country to create investment wave .since irda came into existence in 2001 everyday insurace laws are changing in our country as a result investors both nationally and internationally not looking our country as investment friendly. in the form of ulip plan crores of rupees are being looted from our customers and irda remains merely like watch dog. so consistency in laws and regulations plays a greate role for any industrial development . so far as high upfront commission are concerned we should know that distributors are not salaried people or institutions as a result against every sale there are minimum five canvas so who will take the cost of rest four canvas where sales were not made. therefore I think high upfront commission is a viable and scientific approach to keep the industry growing and if we think that high upfront commission is one of the main reason for rebating then we should know that even 50% rebating is working in postal scheme where commission rate maximum 1%.
H A Chandrashekar · 4 weeks ago
Its great gesture on the part of IRDA, to rationalize Commission structure. Increase in Commission is a great move. In other developed countries, they are already giving 40% upfront Commission to Agents. With immediate effect they must effect the same. Retention of Agents is great concern for any Insurance company nowadays. Concept selling like Life Insurance selling is a toughest task in the world. We are selling dreams & people wl give least priority for covering Life Insurance in India.
Reply
Indira · 4 weeks ago
Agree with Mr Nagaraja K, DB Desai and Samir Das as well.
Sukhdarshan Singh · 4 weeks ago
Gd it will help to stop miss seling insurance
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