The Pension Fund Regulatory and Development Authority (PFRDA) deals with issues related to improving financial literacy to establishing standards for financial advisers and it is their recommendation that insurance premia should not be used to pay agents. This is the biggest portion of insurance cost as up to 40% of the 1st year’s premium, 7.5% of the 2nd year’s and maximum of 5% thereafter goes to the insurance agent who sold you the policy.
If this commission is replaced with straight selling fees the insurance premium will be reduced significantly. The proposed changes will affect around three million insurance agents in the country who earned about Rs.14,704 crore as commission in 2007-08 by selling various policies. Because of this, the committee wants the first year commission reduced to 15% immediately, to 7% in 2010, and zero in 2011. The committee believes that the high commission on the first year’s premium makes the agents mis-sell the policies. According to the Insurance Regulatory and Development Authority there were 8.6 million lapsed policies in 2006-07. The interim period should be used by the insurance companies to help agents sell the policies in a more mature way.
The commission and reward system today makes advisers the agents of insurance companies whereas their compensation comes from fleecing the customer. This gives rise to an inherent conflict in the relationship.
The life insurance industry is not happy about this recommendation as they are dependent on their agents for their business but this structure is completely beneficial to the customers. Insurance agents who survive on commissions only will be in trouble when this recommendation id accepted.
Insurance analysts are eyeing the benefits of this proposal and have open to comments. The markets will be fit for insurance product sales and unit-linked products might have to take the back seat. Consumers will be gloriously benefited from the increased transparency leading to enhanced accountability.
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Tags: Insurance, insurance policy, Life Insurance