Though the new bill has paved the way for hike in commission payouts, it comes with caveats.
Last week, the government gave its go ahead to the much-awaited Insurance Law (Amendment) Bill after a logjam of six years.
Apart from FDI hike, the bill has given more power and flexibility to IRDAI to review, monitor and decide the commission structure of insurance intermediaries. Simply put, IRDAI can now remove cap from commission, which it has been propagating for years. Removing this cap will give insurers the freedom to decide the commission structure on their own. A few media reports suggest that the first year commission of insurance agents may go up by 160%.
Another significant impact is that insurance agents can easily shift from one insurance company to another.
Though the new bill has paved way for hike in commission payout, it comes with caveats. The bill has imposed some stringent norms for both insurance and insurance intermediaries in order to curb mis-selling and discourage unethical sales practices.
The bill has proposed a host of changes. It has given more teeth to IRDAI on dealing with frauds and mis-selling. It has allowed IRDAI to impose a fine of up to Rs.1 crore on insurance companies for mis-selling and violation of code of conduct.
Since IRDAI Chairman TS Vijayan had recently announced its intention to end the current agent licensing system, the onus on recruitment of agents is likely to pass on to the insurance companies, making them liable for all actions of their agents.
Also, the regulator has doubled the penalty on insurance intermediaries from Rs.5 lakh to Rs.10 lakh for pass backs. The bill proposes to restrain insurance agents from becoming directors on the insurer’s board. In addition, multi-level marketing schemes will also be a thing of past. Simply put, insurance intermediaries cannot hire unauthorized persons to execute sales by offering incentives.
Earlier in December, IRDAI had proposed to tighten norms for selling insurance policies in order to check mis-selling. In a draft circular, IRDAI had asked insurance companies and insurance intermediaries to strictly adhere to the IRDAI advertisement regulation in which it had restricted use of any misleading information to sell policies. The insurance regulator has recommended that the products should be suitable to the policyholder’s income, personal and family circumstances, life stage, financial goals and risk appetite.
Clearly, the government and the insurance regulator are serious about curbing mis-selling and fraudulent sales practices. The insurance industry is gradually transforming from ‘buyers beware market’ to ‘sellers beware model’.
A senior official from a private insurance companies is of the view that insurance intermediaries should keep record of advice to avoid any future conflicts. “At times, investors feel that they were mis-sold when the product fails to meet their expectations due to external factors like underperformance of market or slowdown in the economy. It’s better to keep record either in electronic or physical form to avoid dispute arising of such situations.”
Suresh Sadagopan of Ladder7 Financial Advisories believes that agents should do need analysis and risk profiling before recommending any products. “Insurance intermediaries should voluntarily try to find out the needs, investment objective and other relevant information of their prospects. Also, they should try to assess risk appetite of prospects while recommending any product.”
“Advisers need to clearly disclose the returns on investment and manner in which it is calculated. Typically, traditional policies deliver CAGR of 4% to 6%. However, a few insurance companies usually calculate returns on sum assured which reflects higher returns on investments,” says a Mumbai based IFA.
Since mis-selling has no clear definition, it becomes pivotal for intermediaries to improve their practice, create transparency through disclosures and put in place better system to avoid such disputes.