Raw deal for life insurance Agents?

The recent report of the Committee on Investor Awareness and Protection, headed by D. Swarup, Chairman, Pension Fund Regulatory and Development Authority, has rattled life insurance agents throughout the country.
The committee has recommended that instead of paying commission, insurance companies should ask their agents to charge their clients a fee for the advice given. This will lead to a cut-throat competition and end up in customers preferring agents charging the lowest fee over those capable of giving the best advice.
Sec. 41 of the Insurance Act prohibits an agent giving part of the commission to his client since such rebating will give rise to unfair trade practices and induce the customer to prefer an agent giving higher rebate. When the Insurance Regulatory and Development Authority (IRDA), the Life Insurance Corporation and agents’ organisations are striving to rid the industry of this unfair practice, it is unfortunate that the committee has recommended it as a desirable practice.

Much maligned lot
The committee has stated that a huge sum of Rs. 14,704 crore is being paid as commission to agents. When divided by the number of agents, this would amount to just Rs. 8,000 a month per agent, much lower than what a clerk in government service gets. The agent can only dream of job security, guaranteed pay with regular increments and fixed hours of work.

On an average, he has to meet 10 prospects, at times convenient to each, to procure one policy. Not only that. The first year commission constitutes a major portion of his income and about 50 per cent of it goes towards expenses for procuring the business.

To make matters worse, the effect of the Insurance Amendment Bill introduced in Parliament will be to remove some of the existing provisions for protection of agents. In 1993, a sample survey, covering cities, towns and villages across the country, was conducted by an independent agency. More than 95 per cent of the persons interviewed could recognise the LIC’s emblem and had a good opinion of the organisation. The credit for creating such an awareness for insurance goes to the field force. Why then is this class of insurance workers being meted out such a bizarre treatment? It defies all logic.

High lapsation ratio
What about high ‘lapsation and churning of policies’ pointed out by the committee? This is to be measured by the average number of policies that last through maturity, as a proportion of the number of policies issued each year. This is about 40 per cent in Indian and less than 20 per cent in developed countries. The private insurance companies which suffered high lapsation during the initial years have shown good improvement over the last three years.
An agent cannot continue to earn his living unless he keeps abreast of the fast changing financial environment, rules and regulations. Many institutions, run by agents themselves, have come up throughout the country to give continuous training and the agents pay from their pockets for this periodical training. The IRDA has enough funds. But, it requires will and vision to make proper use of these funds. It should extend liberal assistance to the institutions engaged in making the agents better professionals.

Front loading myth
The committee has also criticised the front loading of the cost by life insurance companies. This refers to the practice of recovering upfront from the policyholder the cost across many years. In actual practice, however, just the reverse happens.
The higher first year cost of insurance companies is not due only to agency commission. It includes the cost of (a) agency managers, whose duty it is to recruit and train the agents and also guide them continuously about the new products and changes in rules and regulations (b) sales managers (c) medical examinations, underwriting of risk and issue of policies and (d) publicity and promotion. This higher first year cost and other renewal costs are spread uniformly over the entire term of the policy and included in the premium charged. That is, the companies first spend and recover the amount spent over the years. In many developed countries, the high first year cost is collected upfront separately as policy fee and does not form part of the premium. Not so in India. Only under unit linked insurance products, which are a recent phenomenon, is there some front loading.
The LIC enjoys the distinction of having the lowest first year cost ratio among insurance companies of all countries. The new insurance companies in the private sector will reach this comfortable level in the next ten years. The Indian consumer is thus in a better position than his counterparts elsewhere.

Policy lapses plague life insurers

The life insurance industry is seeing a sharp rise in policy lapses as subscribers are not paying renewal premiums on time.


The rate of policy lapses in the country has increased more than three-fold in the last three years — this is the highest since the industry was opened to private players in 2000-01.

Industry-wide data available from the Insurance Regulatory and Development Authority (IRDA) and the Life Insurance Council revealed that the retention ratio which was at 95 per cent in 2002-03 had declined to about 83 per cent in the year ended March 2009 (See chart).

A decline in the retention ratio means an increase in the policy lapse ratio.

While the retention ratio fell 2.5 percentage points to 92.51 per cent by 2005-06 from 95 per cent in 2002-03, between 2006-07 and 2008-09 it declined nearly 10 percentage points to 82.96 per cent. Besides, the lapse ratio had increased significantly in 2008-09 compared with the previous years.

A large part of the rise in the lapse rate is attributed to the introduction of unit-linked insurance plans (Ulips) and their mis-selling. Currently, more than 75 per cent of all life insurance policies sold in the country are Ulips.

In most cases, Ulips were sold as an investment instrument rather than as an insurance product; a majority of those who bought them didn’t properly understand the risks and charges under such policies.

In 2008-09, the bloodbath in stock markets affected fund values under the unit-linked plans, leading to the non-renewal of policies.

“We have seen higher policy lapses under unit-linked plans than under traditional schemes,” said Sunil Kakkar, chief financial officer of Max New York Life, a private sector life insurance company.

In many cases, Ulips were wrongly sold to people, who could not take market risks.

In other instances, agents sold regular premium policies as single-premium policies to customers. “To pre-empt the occurrence of such incidents, we made our policy proposal forms in different colours for single-premium and regular-premium policies,” said P. Nandagopal, chief executive officer of Reliance Life Insurance Company.

Even the insurance regulator had expressed concern many times over the gross mis-selling of Ulips.

During a visit to the city a few months back, IRDA chairman J. Hari Narayan had expressed apprehension about the predominance of Ulips in the portfolio of life insurers. “The percentage of Ulips has to be brought down to at least 50 per cent if life insurers want business sustainability,” he had said.

However, it is not solely because of the high commission structure of individual agents that mis-selling happens.

Agents have to meet steep sales targets, failing which their agency gets terminated.

The high attrition rate of individual agencies explains the high prevalence of “orphan” policies.


Source: The Telegraph,Kolkata,13/10/2009.