Irda expresses concern over high lapse ratio in life insurance
KOLKATA: The Insurance Regulatory and Development Authority (Irda) plans to review the commission structure of life insurance agents.
The regulator is expected to take a look at the practice of heavy front-loading of commissions given the high lapse ratio of 30-35% among life companies.
It might seek to spread the commission more evenly over the tenure of the policy.
While the maximum amount stipulated for commission cannot be changed, the structure can be changed, said Irda officials.
Under the Insurance Act, an insurer is allowed to pay as much as 40% commission in the first year of the policy, a maximum of 7.5% for the next two years and a maximum of 5% every year till the policyholder dies or total commission works out to be 65%, whichever is earlier.
According to rules, an agent forfeits the commission if he is unable to renew the policy. Irda is of the opinion that if the first year commission is lower and evenly spread out, the agent will be interested in retaining the customer and help in reducing the lapse ratio.
However, most insurance firms feel they should be given the flexibility to decide the structure for their product range.
Debashis Sarkar, director, marketing, product management and corporate affairs, Max New York Life, said, “In the first year, the commission is higher as the agent advisors have to put in more effort to understand the customer needs and provide appropriate financial advice and product solutions.
The commission usually reduces in subsequent years to compensate the agent advisor for servicing efforts that is required for the customer”.
“We believe companies should be given the flexibility to decide the commission structure as it will help them reward the agents’ efforts and also align commissions with product requirements.
For example, products that are complex and long term in nature should pay the highest commissions to compensate the agent advisor for the time and effort”, Sarkar said.
Anjana Grewal, senior VP, marketing, Birla Sun Life, said,
“We think the existing commission structure and its spread over the tenure of the policy is reasonable. We are the pioneers of Ulips in the country and these policies require a deeper understanding of the product, where we feel the commission structure is justified”.
“We will wait till Irda mandates further changes. Our agents are trained in such a manner that they understand the product well before they go out and sell the product.
The company ensures that all information is shared with the customer and his consent is taken thereof by a mutual agreement. This rigorous process enables high persistency rates for us”.
