A mixed bag for insurance

For the life insurance industry in India, 2009 has been a year of transition. The industry is witnessing substantial regulatory and economic changes. Most (but not all) developments are positive. During the year, the Insurance Regulatory and Development Authority and the insurance industry took a slew of measures to enhance customer orientation. These include a cap on the Ulip charges, lower solvency requirements for protection-oriented products, stronger corporate governance and better disclosure norms.

The cap on allocation charges by insurers maximises the customers’ investment. Lower solvency encourages insurers to market pure protection products more aggressively, which is an important step toward increasing insurance penetration in the country. Stronger corporate governance and transparency is reassuring for customers who want to avoid unpleasant surprises.

On the flip side, some generalised misconceptions about the insurance sector have persisted. Prime example is the lack of understanding of the agents’ role and misguided views to modify the agents’ compensation structure. These proposals fail to take into consideration the important role that agents play in increasing insurance penetration in the country.

Unlike a demand-led product, insurance has to be sold. People do not immediately appreciate the need for insurance or necessarily understand the options available to them. These concepts need to be explained to them. It takes an agent 3-5 meetings with a customer before he is prepared to sign up for coverage.

Often, the agent coordinates medical check-ups and prepares a confidential report that is used for underwriting. For all this work, a typical active agent is able to sell only two policies in a month and earns about Rs 5,000 as fees. This is not unfair and is required for developing insurance. Further, the people who want to modify the agent compensation model selectively refer to a 40% commission payout. This is the maximum commission allowed. In reality, the average commission paid in the last financial year was less than 7.5%.

Kapil Mehta is CEO of DLF Pramerica Life Insurance