43 COMMISSION STRUCTURE OF FINANCIAL CONSULTANTS

6.1 Commission payable to the consultants

The Company has decided to review the commission rates with effect from 16.11.2003. This note details the changes in the commission rates payable to individual financial consultants with effect from 16.11.2003. The Company has been offering first year commission at a uniform rate across all tenors. The cost for the short-term policies are different from the long-term policies, hence the consultant would henceforth be paid commission at a rate, which differs as per the tenor of the policy. The Company has not been differentiating between the basic commission and the bonus commission so far. This decision was taken in view of the fact the financial consultants were new and required some time to understand the life insurance business. It has now been decided to pay performance based bonus commission, linked to production levels, to the consultants with effect from 16.11.2003. The following are the details of the commission structure with effect from 16.11.2003.

6.2 Basic First Year Commission

a) Basic First Year Commission payable on regular premium policies issued with a premium paying term of 15 years and above

44 Basic commission as a percentage of First Name of the Plan Endowment Assurance Plan Money Back Plan Childrens Plan Term Assurance Plan Loan Cover Term Assurance Plan Personal Pension Plan Year Premium received 25% 25% 25% 20% 20% 7.5%

b) Basic First Year Commission payable on regular premium policies issued with a premium paying term of less than 15 years

Basic Commission as a percentage of First Name of the Plan Endowment Assurance Plan Money Back Plan Childrens Plan Term Assurance Plan Loan Cover Term Assurance Plan Personal Pension Plan Year Premium received 20% 20% 20% 15% 15% 7.5%

c) Basic Commission payable on single premium policies irrespective of the premium paying term

Name of the Plan

Basic Commission as a percentage of Single Premium received 2%

Single Premium Whole of Life Insurance Plan

45 Term Assurance Plan Loan Cover Term Assurance Plan Personal Pension Plan 2% 2% 2%

Basic Commission would be payable on the actual amount received and adjusted towards first year premium on regular premium policies and single premium policies by the company. In case the policy is cancelled in the first three years or the policyholder exercises the option to withdraw the policy in the look in period or the benefits under the policy are reduced, some or all of the basic and bonus commission, as applicable, would not be payable and if paid, the same would be reclaimed. Example: In case a proposal is converted under the quarterly mode of payment on 16.11.2003 with a quarterly premium of Rs 4,300 under the Endowment Plan for a term of 20 years then the basic commission would be paid as follows: 1. Rs. 1075 (25% of Rs 4300) would be paid once the proposal is converted and the First Premium Receipt is issued. 2. Rs. 1075 (25% of Rs 4300) would be paid on the client making the payment towards premium due 16.2.2004. 3. Rs. 1075 (25% of Rs 4300) would be paid on the client making the payment towards premium due 16.5.2004. 4. Rs. 1075 (25% of Rs 4300) would be paid on the client making the payment towards premium due 16.8.2004. In case the policy is lapsed during the first year and is later reinstated then the basic commission and bonus commission, as applicable, would be payable on reinstatement of the policy on the first year premium adjusted at the time of reinstatement of the policy.

6.3 Bonus Commission

Bonus commission would be payable on the first year premium received and adjusted on the regular premium policies under the following plans, subject to the fulfillment of the criteria for payment of bonus commission mentioned below. 1. Endowment Assurance Plan

46 2. Money Back Plan 3. Childrens Plan 4. Term Assurance Plan 5. Loan Cover Term Assurance Plan Bonus commission is not payable on the single premium plan and on the policies issued under the Personal Pension Plan. The revised bonus commission structure comes in force with effect from 16.11.2003. Consequently the present system of payment of bonus commission to all consultants would be in force till 31.10.2003. Consultants would be paid bonus commissions as per the revised bonus commission structure on policies converted on or after 16.11.2003. Rate of Bonus Commission Bonus commission rate would depend on the consultant crossing the minimum NEP (Net Effective Premium) thresholds during the period 16.11.2003 to 30.6.2004 as mentioned below. Bonus Commission as a Period 16.11.2003 to 30.6.2004 NEP (Net Effective Premium) thresholds 1,00,000 2,00,000 3,50,000 percentage of the First Year Premium received 5% 10% 15%

NEP means Net Effective Premium. NEP is the total of the annualised premium under regular premium policies where the premium is multiplied with the frequency of payment and 10% of all single premiums received by the company, reduced by lapses, surrenders and reduction in policy benefits in the first three first policy anniversary years as applicable. The method of calculation of NEP is given separately in this document. Please note the following points with regard to the payment of bonus commission: 1. NEP achieved during the period 16.11.2003 to 30.6.2004 across all products including single premium policies and Personal Pension Plan policies would be taken into account while determining the eligibility for the payment of bonus commission. The bonus commission would however be payable only on the first year premium adjusted under the

47 policies eligible for bonus commission during the period 16.11.2003 to 30.6.2004. The policies eligible for bonus commission are mentioned above. 2. Bonus commission would be payable to the consultant on attaining the NEP thresholds mentioned above. The rate of bonus commission would depend on the NEP achieved during the period 16.11.2003 to 30.6.2004. Bonus commission will be paid at the end of the month in which the financial consultant qualifies for the same. 3. On the 1st of July every year the NEP acheivement would be reset to zero and the consultant would have to cross the NEP threshold fixed by the company to be eligible for bonus commission. 4. Bonus commission is payable only on the eligible premium [a] collected during the period 16.11.2003 to 30.6.2004. In case bonus commission is not payable to a financial consultant, as he has not crossed the NEP threshold during the above-mentioned period, the premium on which bonus commission is not payable would not be carried forward to the next agency year. [a] Eligible premium means the first year premium received and adjusted during the period 16.11.2003 to 30.6.2004 on policies eligible for bonus commission. [b] Calendar quarter means a period of three months ending in March , June, September and December. The calendar quarters are 1st Jan to 31st March, 1st April to 30th June, 1st July to 30th September and 1st October to 31st December. 6.4 Concession to New consultants in the first agency year It has been decided to make concessions for the benefit of new consultants who have not completed two full calendar quarters [b] from the date of licensing. The NEP thresholds for such consultants would be fixed at 50% of the NEP thresholds for other consultants till the consultants completes two full calendar quarters from the date of licensing. The NEP threshold in such cases would be calculated proportionately taking the date of joining as the first day of the month in which the financial consultant is licensed. For all consultants who join in the month of November 2003, the date of joining would be taken as 16.11.2003. For example in case a consultant joins the company on 20.11.2003, the following would be his NEP thresholds for the period 16.11.2003 to 30.6.2004

48 Bonus Commission as NEP (Net Effective Period 16.11.2003 to 30.6.2004 Premium) threshold 50,000 1,00,000 1,75,000 a percentage of the First Year Premium received 5% 10% 15%

In case a consultant joins the company on 30.1.2004, the following would be his NEP threshold for the period 30.1.2004 to 30.6.2004. Period NEP (Net Effective Bonus Commission as Premium) threshold a percentage of the First Year Premium 30.1.2004 to 30.6.2004 40,000 80,000 1,40,000 received 5% 10% 15%

The concession of 50% of the NEP threshold would be extended to the consultants who are on roll as on 16.11.2003 and who have not completed two full calendar quarters. The NEP threshold for such consultants, for the period 16.11.2003 would be calculated proportionately by giving benefit of the concession till the consultant completes two full calendar quarters. The renewal commission would be payable on adjustment of the renewal premium[1] under the policy. No renewal commission is payable in single premium plans.

[c] The threshold for the period 16.11.2003 to 30.6.2004 is calculated taking the date of joining as the first of the month of joining. The consultant would complete two calendar quarters on 30.6.2003, hence the threshold for such consultant would be 50% of the threshold for other consultants. For the other consultants the threshold is 100000, hence the threshold for the consultants who joins on 16.11.2003 would be 50000. The date of joining is not taken from the first of the month as the changes are effected from 16.11.2003. [d] The threshold for the period 30.1.2004 to 30.6.2004 is calculated taking the date of

49 joining as the first of the month of joining. Since the consultant would not complete two calendar quarters the threshold up to 30.6.2003 is taken as 50% of the Hence the first threshold is {(100000/7.5)*6}*0.5=40000.

6.5 Reclaim of commission

Commissions would be reclaimed for all policy returns during the look-in period. Commissions would also be reclaimed in case of lapses, surrenders, cancellations and reduction of policy benefits within a specified time period under the following plans: 1. Endowment Assurance Plan 2. Money Back Plan 3. Childrens Plan 4. Term Assurance Plan 5. Loan Cover Term Assurance Plan 6. Personal Pension Plan

Commission reclaim would apply to total first year commission (basic and bonus) paid under the policy. The amount of commission that would be reclaimed is given in the following table.

Policy lapsed/cancellation/ surrendered or benefits reduced before payment of 2 installment premium 3rd installment premium 4th installment premium 5th installment premium 6th installment premium 7th installment premium 8th installment premium
nd

Percentage of First year commission reclaim Yearly mode 100% 50% Nil Nil Nil Nil Nil Half Yearly mode 100% 100% 100% 50% 50% Nil Nil Quarterly mode 100% 100% 100% 100% 100% 100% 100%

50 9th installment premium 10th installment premium 11th installment premium 12th installment premium 13th and subsequent installment premiums [1] Renewal premium means premium received other than the first year premium i.e. the premium for the second policy year onwards. Service tax and income tax deducted at source on commission reclaimed would be set off against service tax and income tax deducted at source respectively, in the financial year in which commission is reclaimed. Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 50% 50% 50% 50% Nil

6.6 Net Effective Premium (NEP)

NEP is a key measure for the consultants performance. NEP means the Net Effective Premium and is calculated only on new business brought in by the consultant. The method of calculation is as follows 1. In case of regular premium policies the NEP means the annualised premium under the policy i.e. modal premium multiplied by the frequency of payment. (e.g. in case the quarterly premium under a policy is Rs 4000, NEP would be 4000 X 4 = 16,000) 2. In case of single premium policies the NEP means 10% of the Single Premium received. (e.g. in case the single premium under a policy is Rs 1,00,00, NEP would be 1,00,000 X 0.10 = 10,000) 3. NEP arrived above is reduced for lapses, surrenders, cancellations and reduction in policy benefits in the first three policy anniversary years, as applicable. The reductions in NEP are explained later. NEP is a benchmark for assessing the consultants entitlement to- Payment of Bonus commission - Club Membership - Agency retention (the consultant will be given NEP targets at the beginning of each

51 business year for continuation of the agency). The NEP targets for the current year would be communicated separately.

Reduction in NEP NEP would be reduced for all policy returns during the look-in period. NEP would be reduced in case of laps es, surrenders, cancellations and reduction in the policy benefits within a specified period as mentioned below 1. In case a policy issued prior to 16.11.2003 is lapsed, cancelled, surrendered or the benefits under the same are reduced in the first year of the policy, then the NEP of the consultant would be reduced. The reduction would be to the extent of NEP calculated on that policy as per the method mentioned above. The reduction in NEP would be done in the month in which the policy is lapsed, cancelled, surrendered or its benefits are reduced. 2. In case a policy issued prior to 16.11.2003 is lapsed, cancelled, surrendered or the benefits under the same are reduced in the second year of the policy, then the NEP of the consultant would be reduced. The reduction would be to the extent of 80 % of the NEP calculated on that policy as per the method mentioned above. The reduction in NEP would be done in the month in which the policy is lapsed, cancelled, surrendered or its benefits are reduced. 3. In case a policy issued on or after 16.11.2003 is lapsed, cancelled, surrendered or the benefits under the same are reduced the NEP reduction would be to the extent as mentioned in the table given below.

Policy lapsed/cancelled/ Surrendered or benefits reduced before payment of 2 installment premium 3rd installment premium 4th installment premium
nd

The following percentage of the NEP under that policy would be reduced from the NEP of the consultant in the month of lapsation/cancellation/surrender or reduction in benefits Yearly mode 100% 50% Nil Half Yearly mode 100% 100% 100% Quarterly mode 100% 100% 100%

52 5th installment premium 6th installment premium 7th installment premium 8th installment premium 9th installment premium 10th installment premium 11th installment premium 12th installment premium 13th and subsequent installment premiums Examples of NEP calculation Example 1 In case a consultant brings in an Endowment Assurance policy for a term of 15 years and a yearly premium of Rs 10,000, then the NEP would be calculated as follows Premium Amount (Rs) 10,000 Example 2 In case a consultant brings in a Term Assurance policy for a term of 10 years and a halfyearly premium of Rs 10,000, then the NEP would be calculated as follows Premium Amount (Rs) 10,000 Example 3 In case a consultant brings in a Personal Pension Plan for a term of 25 years and a quarterly premium of Rs 10,000, then the NEP would be calculated as follows Premium Amount Mode Rate of Basic Basic Annualised NEP Mode Halfyearly Rate of Basic Commission 15% Basic Commission payable (Rs) 1,500 Annualised Premium (Rs) 20,000 NEP 20,000 Mode Yearly Rate of Basic Commission 25% Basic Commission payable (Rs) 2,500 Annualised Premium (Rs) 10,000 NEP 10,000 Nil Nil Nil Nil Nil Nil Nil Nil Nil 50% 50% Nil Nil Nil Nil Nil Nil Nil 100% 100% 100% 100% 50% 50% 50% 50% Nil

Commission Commission Premium (Rs)

53 (Rs) 10,000 Example 4 In case a consultant brings in Single Premium Whole of Life Insurance Plan for a single premium of Rs 1,00,000, then the NEP would be calculated as follows Premium Amount (Rs) 1,00,000 Mode Single Premium Rate of Basic Basic payable 2,000 Single NEP 10,000 payable (Rs) 750

Quarterly

7.5%

40,000

40,000

Commission Commission Premium (Rs) 2% 1,00,000