MUMBAI: The insurance regulator is looking to crack down on commissions that take a big bite out of initial premiums, mostly without the customer's knowledge. Such commissions can at times be as much as 25-30% of the first payments on policies. Under the proposed new rules, the Insurance Regulatory & Development Authority (Irda) has sought to restrict the expenses that an insurance company can charge on premiums, correcting a decadesold practice of big commissions paid to distributors that have been weighing down returns for policyholders.
These mostly go under the radar and are only discovered, for instance, at the time of early surrender of a policy, experts said. The regulator has also proposed the scrapping of upfront commissions that some insurance companies pay distributors such as banks, which could put a question mark on such tieups.
ET has reviewed a note by the regulator announcing the new rules that are yet to be notified. The move by the regulator will help reduce mis-selling of policies. "This will bring in transparency and discourage forced selling of insurance products," said SB Mathur, former chairman of the state-owned Life Insurance Corp. of India ( LIC). Irda has proposed a policy for the allocation of expenses for various segments. It said that no insurer should spend more than an aggregate 10% of all firstyear premiums and 4% of all renewal premiums on policies granting deferred annuities for more than one premium; 5% of premiums received during the year on single-premium annuity products and 1/20th of 1% of the average of the total sums assured by policies excluding single-premium policies.
The proposed rule changes may lead to some immediate pain but will have a beneficial effect in the long term, said an executive. "In the short term, it will put pressure on insurance companies to cut costs by innovation, digitisation, reducing customer acquisition costs and reducing turnaround time," said a compliance officer at a large life insurance company."If the overall expense of companies comes down, it will benefit both policyholders and shareholders." The insurance regulator has sought to ban advance payments to intermediaries or distributors as part of the new expense management norms.
"No upfront payments whether direct or indirect is allowed in respect of current and future business volumes to insurance intermediaries," Irda said. "No payment to insurance intermediaries can be made in advance before the risk start date of any policy-whether retail or corporate." Such upfront commissions are generally part of corporate agency partnerships, where insurance companies get into a long-term tieup with banks. Insurers find selling products through bank branches attractive as it's a low-cost model and provides access to an existing customer base. According to media reports, AIA paid Citibank $800 million as part of an Asia deal to distribute products of the Hong Kong-based insurer in 11 markets including India in 2013. Prudential is said to have paid $1.2 billion in fees in installments over three years to Standard Chartered Bank for a 15-year tieup. In India, Citibank sells products of Tata AIA Life Insurance while Standard Chartered sells ICICI Prudential Life Insurance products.
Similarly, Max Life Insurance gave Axis Bank a 4% stake for a 10-year strategic distribution partnership. Also, MetLife is understood to have signed up Punjab National Bank with a hefty upfront commission. Insurers and banks were not immediately reachable for comment.
These mostly go under the radar and are only discovered, for instance, at the time of early surrender of a policy, experts said. The regulator has also proposed the scrapping of upfront commissions that some insurance companies pay distributors such as banks, which could put a question mark on such tieups.
ET has reviewed a note by the regulator announcing the new rules that are yet to be notified. The move by the regulator will help reduce mis-selling of policies. "This will bring in transparency and discourage forced selling of insurance products," said SB Mathur, former chairman of the state-owned Life Insurance Corp. of India ( LIC). Irda has proposed a policy for the allocation of expenses for various segments. It said that no insurer should spend more than an aggregate 10% of all firstyear premiums and 4% of all renewal premiums on policies granting deferred annuities for more than one premium; 5% of premiums received during the year on single-premium annuity products and 1/20th of 1% of the average of the total sums assured by policies excluding single-premium policies.
The proposed rule changes may lead to some immediate pain but will have a beneficial effect in the long term, said an executive. "In the short term, it will put pressure on insurance companies to cut costs by innovation, digitisation, reducing customer acquisition costs and reducing turnaround time," said a compliance officer at a large life insurance company."If the overall expense of companies comes down, it will benefit both policyholders and shareholders." The insurance regulator has sought to ban advance payments to intermediaries or distributors as part of the new expense management norms. "No upfront payments whether direct or indirect is allowed in respect of current and future business volumes to insurance intermediaries," Irda said. "No payment to insurance intermediaries can be made in advance before the risk start date of any policy-whether retail or corporate." Such upfront commissions are generally part of corporate agency partnerships, where insurance companies get into a long-term tieup with banks. Insurers find selling products through bank branches attractive as it's a low-cost model and provides access to an existing customer base. According to media reports, AIA paid Citibank $800 million as part of an Asia deal to distribute products of the Hong Kong-based insurer in 11 markets including India in 2013. Prudential is said to have paid $1.2 billion in fees in installments over three years to Standard Chartered Bank for a 15-year tieup. In India, Citibank sells products of Tata AIA Life Insurance while Standard Chartered sells ICICI Prudential Life Insurance products.
Similarly, Max Life Insurance gave Axis Bank a 4% stake for a 10-year strategic distribution partnership. Also, MetLife is understood to have signed up Punjab National Bank with a hefty upfront commission. Insurers and banks were not immediately reachable for comment.
Source : http://economictimes.indiatimes.com/
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