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Published in Mint on Jan 14 2016
The Insurance Regulatory and Development Authority of India (Irdai) came out with a draft circular on the payment of commission to insurance agents and intermediaries on Wednesday. The Insurance Laws (Amendment) Act, 2015, gives powers to Irdai to decide remuneration structure for distributors. The draft also specified rewards that can be paid to distributors. “It has formalised the non-monetary incentives that insurers pay to distributors. For example, insurers conduct foreign trip contests to incentivise distributors. As a result of these rewards, the total payment to a distributor would be more than the standard commissions,” said Kapil Mehta, executive director, SecureNow Insurance Broker Pvt. Ltd.
In life insurance, in terms of commissions—distributor incentive that gets paid from the premium—the draft allows for higher commissions for term plans. It has divided life insurance policies into pure risk products (term plans) and other policies that bundle investments and savings. So, for regular premium term plans with a premium payment term (PPT) between 5 and 11 years, the first-year commission is capped at 40%. Subsequently, it is capped at 10% every year in the following years. For policies with a PPT of at least 12 years, first-year commission is capped at 50% of the premium and subsequently 10%. For other than pure-risk cover, the first-year commission for a policy with a PPT of 5-11 years is capped at 30%. Then, till the 5th year, it is capped at 7.5% and, thereafter, 5%. For PPT of at least 12 years, the first-year commission is capped at 35%.
Current rules don’t draw the commission structure according to the product type but according to PPT and the age of the insurer. An insurer can give commission up to a maximum of 40% in the first year only if the agent sells a policy with a PPT of 12 years or more. For insurers more than 10 years old, the first-year cap with the same PPT conditions is 35%. Irdai altered the caps, which became effective from 2014. These caps, while complying with the maximum limit allowed as per the insurance Act, 1938 linked commissions to PPT. Lower the PPT, lower was the commission. So, for a PPT of five years, the first-year commission was a maximum of 15%. The new draft bifurcates PPT into only two buckets, and allows for a maximum cap of 30-35% in the first year. Further, it brings remunerations to brokers on par with that for agents.
However, the overall quantum of payment to distributors seems to have increased in two ways. First, the first-year commission for regular premium plans is a minimum of 30% (existing lower limit is 15%). From the 2nd to the 5th year, commission is capped at 7.5%, and 5% thereafter. At present, the 7.5% limit is applicable only in the 2nd and 3rd year, and then it is 5%.
The second hike is in the form of rewards. Irdai defines reward as an incentive paid to the distributor towards benefits such as gratuity, insurance cover, telephone charges, office allowance, sales and promotion gift items and other such heads. Such rewards to agents are capped at 20% of first-year commission and at 40% for intermediaries. Insurance agents are individuals who follow the tied model of distribution; they sell policies of only one insurer in a particular line of business. An intermediary can be a corporate agent, insurance broker, web aggregator, insurance marketing firm, or any other entity specified by Irdai. The regulator has justified the higher reward for intermediaries saying these have higher establishment costs and compliance requirements.
The draft also seems to pave way for hereditary commissions. “The insurance amendment Act scrapped section 44, according to which, if an agent served an insurer for at least 5 years, the insurer had to pay commissions to the agent or his legal heirs, even if the agent left the insurer, till the course of the insurance policy,” said C.L. Baradhwaj, chief compliance officer and chief risk officer, Bharti AXA Life Insurance Co. Ltd. Since the section was scrapped, insurers may question reintroduction of hereditary commissions.
The draft has suggested changes for non-life insurers too, and the biggest among these is in health insurance. “For other segments, the changes are not significant, but in the case of health retail insurance, renewal commissions for one year duration policies has been indicated as zero. This is perhaps based on the assumption that policyholders will renew their policies every year. But this could be counterproductive as agents may encourage churn to clock in more first-year commissions,” said K.G. Krishnamurthy Rao, managing director and chief executive officer, Future Generali India Insurance Co. Ltd.