- The latest proposal from the insurance regulator could reduce commissions of life-insurance agents some more.
On 23 August, the insurance regulator released draft rules seeking to reduce the commissions that life insurers operating beyond their prescribed spending limits can pay agents for new policies sold. While the change is not as sweeping in scope as some previous ones, if it becomes law, this could mark the latest cut for agent commissions in an industry characterized by product complexity and sharp sales practices.
That product complexity—where insurance is bundled along with investment—is cited as a justification for agent commissions being higher than, say, in mutual funds or real estate. In 2001-02, when the industry was opening up to private companies and Life Insurance Corporation (LIC) had a virtual monopoly, the industry paid a steep 9.1% of premiums collected by it as commissions.
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Such high payouts helped insurers, including new private ones, draw agents. The subsequent years saw aggressive selling—and mis-selling—of life insurance plans, amid a rising stock market. As regulations lagged, such behaviour was most endemic during the period from 2007-08 to 2011-12. Both new policies sold and new-business premiums soared.
The regulator eventually stepped in, cracking down on high commissions and the sales practices it was fostering. Fewer policies were issued, but new premiums kept rising as the industry expanded. Amid several course corrections, commissions as a share of premiums kept falling, and stood at 5.2% in 2020-21. This is still significantly higher than other sectors, though the latest move could lower it further, adding to returns of policyholders. Meanwhile, there’s another growing threat for agent commissions: direct sales by insurers themselves.
Individual to institutional
Life insurers won’t mind the downward trajectory in agent commissions. In the years when commissions were high, the industry was nascent. Insurers needed agents, who were feet on the ground, to expand the market. Today, the industry is more mature, and insurers need them less. In 2013-14, direct sales leapfrogged individual agents as the largest channel of new premiums. These are typically sales made by their own salaried staff, and don’t necessarily involve recurring policy-linked commissions.
The business is shifting from individual channels to institutional channels. Between 2006-07 and 2020-21, the share of individual agents in new premiums collected by life insurers has dropped from 74% to 25%. By comparison, the share of direct sales has increased from 19% to 57% and that of banks from 5% to 15%. A big contributing factor is ‘group policies’ (sold to companies and other organizations), which account for 59% of new premiums. As much as 90% of this is collected by companies directly.
Individual agents remain relevant in the ‘individual policies’ segment. In 2020-21, individual agents brought in about 76% of new-business premiums for policies sold to individuals. Insurers compensate them through commissions. Thus, insurers that have a high share of individual policies (as opposed to group policies) tend to see a greater share of their premiums being assigned as commissions. The two major insurers that led on this count in 2020-21, Tata AIA and MaxLife, received over 90% of their premiums from individual policies.
But they may not necessarily be affected by the latest rule change. Every insurer has a prescribed limit on how much it can spend. This is linked to the nature of the policies sold, premium-paying term and duration of its insurance business. The regulator is now proposing that if an insurer crosses a certain threshold, the first-year commission on regular premium plans for individuals will drop from 35% to 20%.
Start and stop
Data on how the 24 life insurance companies in India fare on this count is not available. Similar limits exist in the non-life segment, where eight insurers were non-compliant in 2020-21, as per the insurance regulator. A research note put out by Emkay Global Financial Services says that most major life insurers are within their prescribed limits. Smaller insurers, though, might face challenges.
Overall, the move is a step in the right direction. A drop in commission boosts returns for policyholders, and incentivizes them to stay on in insurance-cum-investment plans. Typically, in these plans, policyholders optimize rewards over the long term, while a premature surrender amounts to a notional loss. In India, a large number of policies are surrendered prematurely. In 2020-21, the best an insurer managed was taking 63% of policies beyond the fifth year (Pramerica). At the other end, this was a dismal 22% to 36%. The regulator hopes this move will improve those numbers.
www.howindialives.com is a database and search engine for public data.
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