Given the large, and sustained, collapse in gold prices as well as the recovery in stock markets, households are once again investing more in financial assets. But to ensure this momentum lasts, regulators need to do their bit. In this context, the insurance regulator’s move to restrict the upfront commissions paid to agents and distributors is a good one since this raises returns for subscribers to such policies. At present, for a 15-year plus endowment policy, the upfront commission is around 35% of the first-year premium—the trail commission is 7.5% for second and third years and 5% thereafter. Fortunately, the IRDAI had drastically cut the commissions for unit-linked insurance policies to 7.5% of the first year premium from as much as 50% prior to the public spat between the insurance and markets regulators—after an initial slump in sales, these rose once again in FY15. The commission rates, however, were left untouched for conventional policies. So, if a policyholder surrenders a policy after a few years, there is an erosion in even the capital. In FY14, insurers paid R11,839 crore as commission on first-year premium or nearly 10% of the new business premium as against under-9% in FY11. Commission expenses ratio of regular policies went up to 21.8% from 16.5% during the period.
Given India’s insurance penetration of a mere 3.3%, the need is to make insurance more attractive. Indeed, the first-year premium even fell 6% in FY15. While there is a case for keeping insurance premiums high given that it is a very difficult product to sell, if the load is better balanced through the life of the policy, those buying products will face less of a hit. Indeed, stopping trail commissions if the persistency drops beyond a number of years is a good idea. It is also important that insurance products don’t have commissions that are completely out of whack with those for mutual funds since, at a very basic level, both are competing in the same market. It is true mutual funds are an easier product to sell since their returns are higher, but till the market started going up significantly over the last year, mutual fund investments were very poor at the retail level. A large part of the blame for this has to go to Sebi cutting the entry load commissions for agents. While there has been some relaxation in this since funds are free to give commissions from their marketing expenses, Sebi would do well to relook this urgently. In the case of other push products like NPS, in fact, the commission structures will have to be even higher since those buying the product see their returns only after decades. Perhaps financial regulators need to sit down together and relook both absolute and relative commission structures.