IRDA's new norms to benefit policy-holders but hurt agents ET

The Sarawade household in New Delhi, like many others, is worried about its domestic economics these days. The worry is not due to the economic slowdown alone, but the fear of what may be in store for them because of insurance regulatory changes for traditional products that may erode their income. The Insurance Regulatory and Development Authority, or Irda, will herald a new era come January, aiming to reduce costs for policy holders, raise returns, and increase the cover after death. It will also cut to size insurance companies that have been benefiting more from discontinuation of policies than earning from investments.//But an unintended consequence may be that the intermediaries who have been at the centre of growing the industry, by whatever means, may be at the receiving end. Indeed, the measures may be something akin to what the Securities & Exchange Board of India's did three years ago. "It will be very difficult to sustain livelihood by selling insurance anymore," says Naina Sarawade, the 44 year-old housewife who also doubles up as an insurance agent to support her husband's policy sales. "We will go back 10 to 15 years, when we were selling long-term plans and the business was low. It will be very difficult to switch with uncertainty of jobs and income. "

Insurance policies, peddled by 23.59-lakh agents across the country, will have a makeover that may see a quarter of them, mostly recent entrants to the profession, going off the business as commission from the sale of policies dwindles under the new scheme of things. Although financial products have been getting more complicated, insurance middlemen have been selling policies relying on statistics & returns of the past, when hardly anyone questioned about what the unwritten cost of buying such policies was.

A substantial portion of investors' contribution toward policies was flowing into agents' bank accounts in the form of commission, which in some cases was as high as 35% in the first year. The maximum commission that can be paid to the agent under the new dispensation is capped at 15% in the first year, 7.5% in the second and 5% from the third year. At present, companies are allowed to pay 25% in the first year, 7.5% in the second year and 5% from the third year onwards.

Commissions are lesser for shorter-term products and increase progressively depending on the length of the policy life. New policies should have a minimum premium paying term of five years for agents to be eligible to receive these payments. In most cases, investors found out to their surprise that though an insurance policy might have been sold like a fixed deposit or easily saleable instrument, it offered none of the benefits of such products.

Many a time, when out of financial compulsion, a policyholder wanted to exit the investment, he was at the mercy of the insurer who would, at his discretion, decide how much the investor gets. In most cases, it was a paltry sum of 50% of the total with the new regime, scheduled to begin by January 1, signed on by the previous Irda chairman JR Hari Narayan. It was to begin from October 1, but current Irda chairman TS Vijayan decided to provide three more months to insurance companies to adhere to the new norms.

When Sebi banned mutual funds from paying commission to agents from investors' money, the number of mutual fund agents diminished to just a fourth to 20,000 active distributors from 80,000 in 2009. That created quite a flutter, but the markets regulator stood its ground. The jury is out on whether it benefited investors, or just threw some out of jobs. Indeed, yet another product, unit linked insurance plans, or Ulips, faced similar fate at Irda's hands. When commissions on Ulips were brought down to 7%-10%, from as high as 15%-20%, their sales plunged to Rs 69,650 crore a year, from Rs 1,09,036 crore in 2010-11. 

From now on, investors surrendering a policy will get at least 30% of the money paid after completing five terms unlike in the past when the company used its discretion to decide the surrender value. That still is not much and is tilted towards insurance companies and punishes savers. Goldman Sachs estimated that the six top life insurance companies in India earned 37% of their March 2012 profits of Rs 4,182 crore from lapsed policies. But the flip side of these measures aimed at protecting consumer interest is that returns from vestments may also be lower and the industry may not be able to benefit from short-term instruments capturing the flavour of a season. The fact that fund managers in insurance firms have to return a minimum amount will force them to go for safer fixed income securities, rather than equities.

"In participating products (where bonuses are paid regularly), investments have to go into safer instruments, which will bring down the return for policyholders and margins for companies," said Sanjiv Pujari, head, actuary, SBI Life."There is a trade off of giving guarantees as the cost will have to be borne by existing policyholders." At present, 30-40% of investible amount under participating products are invested in equities, which enhance returns over a longer period, unlike fixed income securities. That allocation may fall to 20% in the new regime, fund managers estimate.

To discourage shorter-tenor products, commission on policies has been linked to the premium-paying period for all products. In its earlier revamp of life insurance products, the regulator banned Ulips with tenor of less than five years that were sold like mutual funds. Also, the focus will now be on traditional plans, which will come with higher protection cover in the main objective of insurance. The minimum sum assured is required to be 10 times the premiums paid for age below 45 and for age above 45 years, it will be 7 times the premium paid. "Agents will have to increase productivity by 15% to match up to the present income," said TR Ramachandran, MD and CEO, Aviva Life. "Insurance products have become attractive for customers but insurance sales are dependent on discretionary income in the hands of customers."// It may be too early to declare that insurance industry is moving towards a structure where the cost of entry and exit will match that of others such as mutual funds, bank deposits, or bond purchases. But it promises to be better than what it is now, if implemented without dilution.But life may not be the same for agents. The ubiquitous agents risk being washed away by the changing tide if they are not willing to change with the times. "Any change is difficult but unless you adopt new ideas, you will not be able to succeed. Now, agents will have to work intelligently besides working hard," said Bharat Parekh, an agent with Life Insurance Corporation. "Whatever happens, insurance companies can run their show only through individual agents, so they are investing in retaining agents. A sharp agent will adopt to the change but those who are not willing to will go out of business."