The high level coordination committee on financial markets, which consists of financial sector regulators, is likely to opt for a phased reduction in the commission paid to insurance agents.
When the panel meets next, probably after the Budget, it is expected to take up the report submitted by a committee headed by former pension regulator D Swarup, which has recommended a no-load structure for all retail financial products from April 2011.
Since mutual funds and the new pension scheme have already moved to a zero-load structure, only the insurance industry will be affected. Under the existing structure, the commission is embedded in the premium paid by policyholders and adds up to as much as 40 per cent in certain cases.
For unit-linked insurance plans, which account for up to 90 per cent of the industry sales, the average commission is 15 per cent. Besides, in many cases, the commission in the first year is higher and results in a higher lapse rate. Insurers also levy premium allocation charge, policy administration charge, fund management charge and commission on the agents.
The insurance industry has opposed the scrapping of commission saying it would kill the industry. Insurance Regulatory and Development Authority and the life insurers have argued that insurance is not purchased automatically, but sold by agents.
“Fundamentally, the idea that the commission cannot be embedded in the premium is not a very well considered one and it will kill this (insurance) industry,” Irda Chairman J Hari Narayan told Business Standard.
While the Swarup committee has recommended an across-the-board removal of commission in its consultation paper, it has not suggested that term covers, which are pure insurance plans with a commission of around 2 per cent be kept outside the ambit of the zero-load structure. The committee has argued that markets such as the United Kingdom are going to shift to a load-less regime. The insurance industry says that markets such as the UK, which are very mature, are only planning to shift and have not done so, yet.
An official in the regulatory agency says there are livelihood concerns as well since a structure suggested by the committee would render a large part of the 3 million insurance agents jobless. They have pointed out that the abolition of entry load for mutual funds has left a majority of the financial advisors without much business.
The Swarup committee says that in the absence of a level-playing field, investment advisors would push for products, such as insurance plans where the commission is higher.
A source privy to the discussions says that the draft report by the committee has had the desired impact with insurance companies and the regulator opting to voluntarily lower the commission. For instance, in case of Ulips, Irda has capped overall charges against the earlier regime when insurers were free to levy any fee. “Charges on traditional covers are part of the next round of reforms,” Hari Narayan said earlier this week.
Irda also intends to increase the lock-in period for Ulips from three to five years to ensure higher persistence levels.
“It is a gradual process which has to be undertaken in phases. You cannot remove it overnight. The idea is to reduce it over a period though it may not be easy to go to zero-load,” said a source.
While the life insurance industry saw a 10 per cent rise in premium income during 2008-09, commission expenses went up by 5.64 per cent to Rs 15,533 crore. The smaller rise in commission payments was on account of a decline in the premium from the sale of new policies.
