A committee set up by the Finance Ministry has recommended continuation of upfront commission in traditional policies and ULIPs. Further, the committee has recommended that such commissions should be paid on mortality charges or the part of premium paid towards availing life cover.
Typically, traditional policies like pure term, money back and endowment policies assure fixed returns and benefits. ULIPs, on the other hand, are linked to market (equity, debt and money market) to generate returns, just like mutual funds. The premium paid in ULIPs goes towards mortality, investment and expenses.
Earlier in November 2014, the Finance Ministry had constituted a nine-member committee to review distribution incentives across financial products, rationalize commission structure and recommend measures to curb mis-selling.
The committee, headed by Sumit Bose, former Union Finance Secretary, had submitted the report in August which was made public on September 3. Other 8 members include SB Mathur, Chairman NSE, Manoj Joshi, Joint Secretary Finance Ministry, Partha Ray, Professor IIM-Kolkata, Monika Halan, Editor Mint Money, Manju Puri, Research Adviser, CAFRAL, S Vishvanathan, Former MF of SBI, Prithvi Haldea, Chairman Prime Database and Anupam Mishra, Director (Secondary Markets).
In the report, the committee has said, “Upfront commission should be allowed for the mortality part of the premium. These can remain within the current limits fixed by the regulator. It is understood that life insurance is a difficult concept and the sellers should be
compensated for the extra work done to sell a risk cover. In bundled products, upfront commissions should be permitted for mortality part of the premium. There should be no upfront commissions on the investment part of the premium.”
Also, the committee has recommended the rationalization of trail commission in traditional policies and ULIPs. The committee has suggested that insurance companies should pay a fixed percentage of premium till the tenure of non-participating policies as renewal commission or trial commission. Participating policies which distribute realized gains among policyholders should pay trail commission based on assets under management.
Meanwhile, the committee has recommended maintaining status quo on single premium policy since the upfront commission is already capped at 2%. No trail commission is paid on such policies.
The committee has strictly recommended putting an end to the practice of paying advance commissions to distributors and passing back of commission to policyholders.
Another key recommendation is on surrender value. The committee has recommended that insurance companies should pay reasonable amount to policyholders after deducting costs and charges on surrendering of a policy. Currently, surrender value is calculated by discounting a certain percentage on paid up value which is generally much lower than premium paid.
Other key recommendations are:
- Mentioning clear split of the premium amount - expenses, mortality and investment
- Participating policies should be benchmarked against index to gauge performance
- Disclosing returns on percentage terms which is calculated on invested amount; that means, misguiding policyholders by using sum assured and maturity benefit to depict inflated returns may not work.
- Guaranteed return policies or non-participating policies should disclosure internal rate of return (IRR).
- Depicting level of risk by using riskometer in ULIPs.