After effects by cutting advisors fee

This paper discusses the issues which may occur due to the suggestion postulated by the
panel on investor awareness and protection (if executed).

The panel on investor awareness and protection, headed by D Swarup, chairman, Pension Fund
Regulatory Development Authority. The committee has members from the finance ministry,
corporate affairs ministry, RBI, IRDA and SEBI. This panel was considering replacing agents’
commission embedded in the premium with a fee-based system. Their efforts to reduce the hefty
commissions to agents from the premium contributions of insurance buyers have received a
setback as a six-member inter-regulatory panel set up to look into it could not agree on the issue.
Currently Insurance Regulatory and Development Authority is resisting the proposal. This is the
latest from the panel of investor awareness and protection by November 10th of 2009.

By November 20th it is expected, a report from the Investor awareness and protection panel. But
with a dissent note from IRDA, which does not support the proposal. “The committee on
investor awareness may have to give its report with a dissent note from the insurance regulator.
The government, however, can accept the recommendation of the panel despite the dissent note,”
said by one of the panel members.

IRDA is not in favor of the committee’s idea to phase out insurance agents’ commission. IRDA
feels that this move could undermine the attempts to increase insurance penetration. Agent’s
commissions could be as high as two-fifth of the first year’s premium paid by the insurance
buyer. The commission passed on by the insurance provider, often without the knowledge of
investor. Because of the stiff opposition, the panel has decided to make a distinction between
pure insurance products and those like ULIPs, which have an investment element in it.

The panel wants to gradually replace the embedded commission in the case of ULIPs with a fee
and reduce the commission on pure insurance products to 5% which could continue till access to
insurance products in rural areas become satisfactory.
 Pension Fund Regulatory Development Authority chairman Mr Swarup states that “there are
118.8 crore consumers and 27 lakh investment advisors. The committee on investor protection
has to see the larger interest”.

Why the fee cut on ULIP?

Unit linked policy (ULIP) is a life insurance policy in which the benefits depend in the
performance of the portfolio of shares. Each premium paid by the insured person is split. Apart is
used to provide life insurance cover, while the balance is used to buy units in a unit of mutual
fund after deduction of costs, expenses. Etc., In this way, a small investor can benefit from
investment in a managed fund without making a large financial commitment. The unit linked
policies can go up and down in value as they are linked to the value of the shares.

In case of ULIP the proposer offers to pay a certain amount towards premium. Insurers insist that
this amount should be in multiples of Rs.500 or Rs.1,000. The term of the policy is also
specified. It should not be less than 5 years or age of 70 for whole life plans. The premium
should be paid as single premium at the start or periodically over the term or less, as in the case
of limited payment policies in yearly, half yearly, quarterly or monthly installments.

Features offered along with ULIP:

• The policy holder can pay additional premium for investment at any time.

• Partial or total withdrawal is allowed. Sometimes there are conditions attached. Some
insurers, not all, charge a redemption fee in such cases.

• The policies will not be entitled to an bonus.

• There is no annual bonus, but there may be a loyalty bonus paid at the end.

• Insurer offer policy holders a choice of funds in which their moneys may be invested
like:

O Equity funds O Money market funds

O Balanced funds O Debt funds

• All these funds will remain invested in a mix of instrument.

• Insurers allow policy holders to switch their moneys from one fund to another during the
term of the policy.

First Year Premium if life insurers for the quarter ended June, 2009
Individual single premium (Including Rural & Social) (Rs. In Crore)
Sl
no Particulars Premium Policies Sum Assured
Jun-08 Jun-09 Jun-08 Jun-09 Jun-08 Jun-09
1 Linked Life
With profit 0 0 0 0 0 0
1816.0 2976.3 1063.4
without profit 5 353.14 405204 76823 4 9
Individual non-single premium (Including Rural & Social) (Rs. In Crore)
2 Linked Life
With profit 0.01 -0.06 0 0 0 0
4783.3 3159.4 244072 173168 44546. 31160.
without profit 2 5 9 9 2 8
Group single premium (Including Rural & Social) (Rs. In Crore)
3 Linked Life
a) Group gratuity schemes
With profit 0 0 0 0 0 0
without profit 54.9 73.33 19 1 55.71 0.27
b) Group savings linked
schemes
With profit 0 0 0 0 0 0
without profit 0 0 0 0 0 0
c) EDU
With profit 0 0 0 0 0 0
without profit 0 0 0 0 0 0
d) others
With profit 0 0 0 0 0 0
without profit 0 0.25 0 1 0 0.05
Group new business - non single premium (Including Rural & Social) (Rs. In Crore)
a) Group gratuity schemes
With profit 0 0 0 0 0 0
2501.9 2136.7
without profit 87.47 148.7 194 208 6 2
b) Grup savings linked
schemes
With profit 0 0 0 0 0 0
 without profit 9.48 8.11 23 71 152.51 275.54
c) EDU
With profit 0 0 0 0 0 0
without profit 0 0 0 0 0 0
d) others
With profit 0 0 0 0 0 0
without profit 13.88 41.66 7 4 152.51 275.54

The above facts and figures clearly show the reasons for the panel on investor awareness and
protection for proposal of cutting the agents fee.

On September 27th, 2002 Insurance Regulatory and Development Authority (IRDA) came up
with new commission plan. The IRDA has in its draft regulations proposed a cap of 30 percent of
first-premium income towards commission for corporate agents in life insurance. It has pegged
the commission for non-life corporate agents at a maximum of 10 per cent.

In the draft regulations now being circulated in the industry, the entities eligible for corporate
agency include firms, companies, banks, cooperative societies and banks, regional rural banks,
panchayats, non-government organizations and non-banking financial institutions.

IRDA has proposed that “specified persons” who work for corporate agents need undergo only
50 hours of practical training against the stipulated minimum of 100 hours for individual agents
— a provision that a section of industry feels would be biased against individual agents.

According to the draft proposals, corporate agents would not be paid more than 2 per cent of the
premium in the case of single-premium policies or in single-premium policies that grant
immediate or deferred annuity. However, in the case of more than one premium on a policy that
grants deferred annuity, commission has been pegged at 7.5 per cent of the first premium and 2
per cent of each renewal premium.

In all other cases, the commission would be 30 per cent on the first premium, 5 per cent in the
second and third years and thereafter 3 per cent of each renewal premium payable on the policy.
IRDA has suggested a sum of Rs 15,000 as license fee for corporate agents, with renewal fee of
Rs 15,000 after three years. For “specified persons” who have taken the requisite training and
examination and would be “soliciting and procuring insurance business on behalf of the
corporate agent”, the fee would be Rs 100 per head, payable to the authority through the
designated person in the insurance company.

The agents are highly beneficial to both the customer and insurer. The following are a few
benefits by the agent (intermediary).

Intermediary benefits to the customer

• Normally customers do not show interest in buying insurance despite their evident need
or the same and so the consumers need the necessary advice and push to enable them to
buy insurance.

• The agents evaluate customer needs and ensure that necessary insurance protection based
on life cycle and occupational needs is offered to the consumer for consideration. They
make meaningful the security of the cover offered.

• The customer faces considerable search costs when trying to buy insurance.
Intermediaries help to create awareness of relevant products and their features and offer
advice on the best buy, and this lowers the search costs of the insured.

• Insurance products are complex contracts and use language that is difficult to understand.
Their value is in the nature of a promise. Customers needs advice and assurance to help
them to reduce their uncertainty costs when buying insurance.

• There can be many procedures involved when buying insurance – such as filling the
proposal form, the production of various documents etc. The intermediary helps to reduce
the complexity and costs involved in the purchase of insurance.
 • Insurance coverage also calls for additional services such as endorsements to the policy,
renewals, no claim discounts, refunds etc. and this improves the value of the coverage
and the intermediary helps to ensure this.

• In the unfortunate event of a claim, the insured needs considerable claims assistance and
facilitating with the insurer/surveyor/ hospital etc. Intermediary tries to reduce the delay
and difficulties.

• They help the customer to move up the insurance value chain and cope with the changes
that are taking place in the marketplace.

Intermediary benefits to the insurer

• Helps the insurer to attract good risks. There is always gap faced by the insurer with
regard to an insured. Intermediaries can reduce these informational costs.

• This helps pricing of risks more accurately, which is also beneficial to keep the low risk
customers with low risk pricing.

• Their services help everyone in the insurance market as otherwise the costs that can arise
out of asymmetric information can load costs on all policyholders, leading to less
demand and credibility of the service offered.

• Intermediaries can be effective market makers, match buyer needs with insurer’s products
and service capability; and give feedback on customer demand and aspirations.

• The intermediary markets new products for the insurer, and helps to judges market
reactions to new product offerings and help to discover the correct price points at which
sales can maximize.
 • They can offer research benefits, test and develop new products, or new services.
• They can provide the insurer with competitive value by collection of information

• They add value in services such as policy endorsement, renewal and claims
documentation.

Earlier this year, the Monetary Authority of Singapore (‘MAS’) conducted a review of the sales
and marketing aspects following the outbreak of the financial crisis and, as one outcome,
identified a number of key areas that needed treatment.

• Product design and suitability

• Sales force competency
• Sales training and tracking
• Marketing messages
• Post sale customer care

Perspectives from India

The areas identified by the MAS as needing treatment in Singapore, are similar to issues that
would be identified in most other territories, including India. There is a tremendous opportunity
for newly globalizing markets such as India to create benchmarks in distribution practices.
A few key aspects in this regard are:
• Recruitment and selection of sales People
• Sales management
• Compensation & Rewards

Recruitment and selection of sales People

Getting the right type of agents in the first place is clearly fundamental to delivering a quality
results in the longer term. More focus needs to be given to exactly the type of people that are
needed: whether primarily ‘hunters’ or those with more ‘farming’ instincts; their values,
background and so on. And the requirements of the role in terms of competencies and activities
need more rigorous analysis. Interviews are still the most common form of selection process but,
as years of experience have shown, interviews in isolation are a relatively poor tool. Personality
profiles have also shown mixed results and, in our view, the best results come (along with careful
analysis of the type of individual needed as above) by interviews combined with behavioral
assessment and competency testing.

Sales management
Too often in our experience, sales managers are a combination of a still active seller and a
recruiter. In the best companies, neither of these roles should be a significant part of a sales
manager’s role. There should be dedicated recruitment resource with only limited involvement
from the sales managers, and the sales managers should be focused on coaching and developing
their sales team.

Compensation and Rewards

Compensation and rewards is becoming an area of focus for the insurance and financial services
industry around the world. Considerable attention globally has been paid to eliminating sales
incentives that may result in product bias, but there is increasing recognition that any form of
product sales related compensation can result in an unacceptable ‘product push’ culture.
Rewarding appropriate behaviors in providing financial advice and products, whilst at the same
time motivating sales people to deliver results is a critical challenge, and is often seen as
contradictory. However, leading edge companies are already implementing more subtle and
sophisticated sales compensation schemes to deliver these two goals in an effective manner.

Conclusion

The final highlight in the MAS regarding Indian perspective i.e., compensation and rewards.
This perspective is even been highlighted by panel on investor awareness and protection. The
panel thought is to give the correct product to the customer which means the agents should have
knowledge on all the products available in the market. There are advantages and disadvantages
to this approach.
The agent may deliver the best product to the customer at the best buy price. Generally the
differentiator of an insurance product is its features and price. There are chances of increasing
competition, if a company is providing a product of same features but at different prices. To
attract a customer companies start to reduce the prices of the products. This will lead to price war
among the insurance companies.

As the commission suggests that to take the fee from customers for providing information. Here
the customer may not know how much he/she has to pay for the agent. This may lead to form
norms and regulations for the IRDA, on the amount how much the customer has to pay to the
agent. This may increase the responsibility for the agent in knowing about the latest products of
various companies.