The insurance industry can heave a sigh of relief as the expert panel on investor protection and awareness has dropped its original proposal to end all commissions for insurance agents from April 2011. In its final report submitted to the government last week, the committee led by Dhirendra Swarup has suggested that agent commissions must be retained for pure life cover products like term insurance.
The move will ensure that Indians get adequate insurance cover, and at the same time, most of the savings put in investment products like unit-linked insurance plans (Ulips) will be invested rather than frittered away in hefty agent commissions and assorted fees. The insurance industry, backed by lakhs of insurance agents, has been up in arms against the draft report released by the Swarup panel in September.
In its draft report, the committee had mooted that all upfront commissions embedded in the premium paid by investors be phased out from the current 16.25% to zero by April 2011. Calling for an immediate cut in commissions to 15%, the panel had said these could be brought down further to 7% in 2010 and reduced to zero in the next year.
The committee?s reasoning was simple?mutual funds have become commission-free and the high commissions in the insurance industry were leading to rampant mis-selling, so that people had little life cover despite investing substantial sums in insurance products like Ulips.
But the committee?s final report has made a concession on commissions paid on term insurance products. ?The committee felt that insuring your life is the most important cover and is the insurance industry?s basic product. Today, people have forgotten about term life cover and are talking only about investment products like Ulips, where most of the money doesn?t get invested in the first year,? a senior government official told FE.
While the Insurance Regulatory and Development Authority (Irda) representative in the Swarup panel has put a dissent note in the report stating that ?it is not in the interest of the industry?, members from the Reserve Bank of India, Sebi and the ministry of corporate affairs (MCA) have fully backed the recommendation. The report will now be considered by the high level co-ordination committee on financial markets.
Mutual fund agents had also raised a hue and cry when Sebi recently abolished entry loads and commissions for mutual fund products. But insurance agents outnumber them multifold and have got the Irda and industry?s backing to call for the report?s burial. Several demonstrations have already been held by agents at the capital?s protest hub, Jantar Mantar.
?The Swarup report suggests that we should take fees and service charges from policyholders instead of commissions. This is not possible in India, where customers are used to passbacks from agents,? said Prem Singhal, member of the LIC Agents Federation of India. According to the Life Insurance Council, the Indian insurance industry has grown to a size of $41 billion, making it the fifth largest life insurance market with an annual growth rate of 32-34%.
