The Bizarre Commission logic by IRDA

Is IRDA trying to solve a wrong problem?

Recently, I read excerpts of a speech from an IRDA member at a summit organized by CII in an article. I will copy a portion of the article below.

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India is one of the lowest commission paying countries in the world, said Nilesh Sathe, Member (Life), IRDAI at the 19th Insurance Summit organized by CII.

“IRDAI has found that Indian life insurers do not pay hefty commissions to their agents.  In fact, it is among the lowest commission paying countries,” said Sathe.

He further clarified, “Insurance agents barely get the entire 35% of first year premium as a commission. They get full commission only on 10% of policies sold. In my view, agents need to be compensated adequately for their hard-work. Insurance being a push-product is difficult to be sell to prospective customers.”

Sharing some analytics on insurance sales practices, he said, “An agent reaches out to 7 prospective clients to sell a single policy. This means, the sales to approach ratio is only 1:7 for insurance. This highlights the sorry state of most agents in the country.”

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I am only partly convinced. It looks like IRDA feels higher commissions will solve all the ills of the insurance sector.

I agree every intermediary needs to be compensated well for the effort. However, not everything boils down to the commission.  SEBI, the markets regulator, is pushing to reduce commissions in mutual funds and the industry, I believe, is doing rather well.

I agree every intermediary needs to be compensated well for the effort. However, not everything boils down to the commission.  SEBI, the markets regulator, is pushing to reduce commissions in mutual funds and the industry, I believe, is doing rather well.

By the way, I assume these words to be the stance of IRDA too.

However, are commissions (low or high) the only reason for low life insurance penetration and poor financial state of the insurance agents?

Poor sales conversions could be due to many reasons

1. It could be due to the poor structure of the life insurance products. OR
2. If the product was good, the agent was perhaps not able to communicate the value of the product to the prospect. OR
3. The prospect does not trust the insurance agent or the insurance company. Many times, the biggest concern of prospects is whether the insurance company will pay up when they or their nominee make the claim.

Has IRDA ever looked into these reasons? Or is the level of commission the only problem?

For all you know, the problem could be the other way round. The commissions could be too high and could be destroying value for the customers. And that could be a reason for poor sales ratios.

If poor incentives were an issue, lesser and lesser insurance agents will try to sell products. It should not reflect in poor conversion ratios. For an agent who is approaching a prospect, the agent (I assume) is ok with the level of commission.

What about low persistency ratios?

Why most life insurers have first year persistency of less than 60-65%? This means about 35-40% buyers do not even pay their second year premium. Fifth year persistency is less than 50% for almost all the insurers.

Again, there could be many reasons behind it.

Perhaps the policyholder felt it was a poor product and was not worth continuing.

Or is it a case of poor after-sales service? In life insurance, most commissions are upfront. Therefore, the agent has already made the bulk of the money from the sale. There is no incentive to follow up on renewal.

What does IRDA have to say about such things?

By the way, I have nothing against insurance agents. I agree most of them struggle to make decent amount of money.

One of reasons could be that pass-backs are rampant in Indian insurance sector. I say this based on my interaction with smaller agents in Tier-2 and Tier-3 cities. I understand this is illegal but how do you track this cash transaction. And agents have to make sales. From the point of view of the customer, this enhances their returns (but this is clearly unfair to agents).

PersonalFinancePlan Take

The right quantum of commission is a never-ending debate. Intermediaries will never have enough and the customer will want to pay lower and lower commissions.

I firmly believe the intermediaries should get the right amount of compensation to make their businesses viable. However, at the same time, the level of commissions should not be so high that it destroys value-proposition for the customers. Traditional life insurance plans offer 4-6% p.a. for a horizon of 20-30 years. This is rubbish.

In my opinion, by focusing on the quantum of commissions, IRDA is missing the bigger picture and doing the entire insurance sector in India a big disservice. It may be trying to solve a wrong problem.

Hiking commissions is a low hanging fruit but we need much wider and better structural reforms.

Here are a few things it can do:

1. Explore better incentive structures (like they have in ULIPs).
2. The commissions should NOT be upfront and be spread out over the years.
3. There should be strict claw back provisions if the policies get lapsed in a few years.
4. Work to improve customer trust in the insurance sector. It is difficult to trust insurance companies when you read about brazen examples of mis-selling and harrowing claim settlement experience on a daily basis.
5. There should be a strong redressal system. The current one is farcical. Insurers bulldoze through customer complaints and escalation to IRDA (through IGMS) is no use.
6. Insurance ombudsman is a good initiative but more can be done. Insurance companies resort to all kinds of tactics.
7. There should be punitive damages for mis-selling, mis-representation, customer harassment and deliberate delays in claim settlements. Minor nominal compensation (for hardship) of Rs 5,000-10,000 for a 2 year delay in claim settlement will never deter insurers.
8. Media campaigns to drive home the importance of life insurance will help increase awareness.