Financial advisers, including insurance agents, need more effective regulation.
The most important point is that regulation should not be viewed as punishment, either by the regulator or by those being regulated. In an evolving era, no regulation can be static. At the same time, the regulator should have a thorough knowledge of the ground realities and consider the views of all concerned before reflecting on the issue.
As we have already stated in a protest letter, the draft report of the Committee on Investor Protection and Financial Literacy, recommending the scrapping of the agents’ commission by 2011 on life insurance and Ulip products, is uncalled for as it appears to have been proposed without having representation from the insurance industry. If the regulator behaves in the same way, without taking all views into account, effective regulation will not be possible.
The upfront commissions embedded in the premium should be cut to no more than 15% of the premium.
There are different classes of intermediaries in the insurance sector—brokers, who are the agents of customers, and agents, who represent the insurance company. The agent has to check the health, income status and other risk factors related to the customer on behalf of the insurance company before he can close the sale. The agent’s job involves many visits to the customer’s residence, hospital, bank, office and other places. He also needs to service the policies over the entire term.
If an agent is limited only to an advisory role, then the costs of marketing, underwriting, servicing and claim verification will be added to the management expenses. Hence, it is natural that an agent should be paid a commission.
The Swarup Committee presumes that every insurance product has a 40% premium paying load. However, according to data available, the average commission expenditure for regular products varies between 15% and 17%. The average for 2007-8 worked out to 7.3% for the entire insurance industry. In 2008-9, the industry average commission expenditure for Ulip policies was 12% and 3% for the first-year premium and renewal premium, respectively.
The disclosure should reveal the income an adviser earns from the sale and maintenance of a product.
There is already a provision for this in the Policyholders’ Protection rules issued by Insurance Regulatory and Development Authority (Irda). According to these rules, an agent has to disclose to the (prospective) policyholder the commission he gets on the product he is selling. It is also mandatory for the agent to reveal the administrative charges and premium allocation charges to the policyholder. Most agents are doing this job perfectly well and advise the customer to take a policy according to the need, insurability and insurable interest.
The entry barrier should comprise knowledge-linked training programmes, which specify knowledge outcomes.
The committee recommendations state that training programmes should be defined by knowledge outcomes rather than by hours of study. Insurance companies are already doing their best to train agents. In fact, today there is a visible change in the level of knowledge of the agents compared with their awareness five years ago. Most agents in urban areas have laptops and are connected to the Net. There might be some lacunae in knowledge when it comes to agents in semi-urban and rural areas, but they know enough to communicate to the people in their respective areas.
Today, Irda insists that an agent or adviser be educated till Class 12. Thereafter, he needs to undergo a 100-hour training period and then pass Irda’s prescribed test. However, many agents are graduates and post graduates. If they impose a rule for entry, I wonder if insurance companies would be able to hire enough new agents. As long as they don’t meddle with the existing agents, we have no issues.
The sales process should be documented and customer profiling should be put in place.
This recommendation sounds good. The declaration mentioned here is already a part of the proposal form. However, in practice, it will be an eye-wash. Building such evidence is like suspecting your own shadow. The agent builds a relationship with the customer over decades, a process that cannot be easily documented. The fact that lakhs of agents have survived the onslaught of time is proof that this kind of long-term relationship building is more effective than paperwork.
There should be a well-defined process to affix responsibility for the bad outcome of a product.
Yes, we agree with this, but why must agents alone bear the brunt? Every person involved in the promotion process should be held accountable. When it comes to mis-selling, agents are easily made scapegoats. Those who drive the agents to sell are left out. Why doesn’t the regulator question the companies that lure and prod their field forces with competition? The drivers for misselling are equally responsible.
Coming to policyholders, there is already an option available for them in the form of a free-look period. If the customer is not satisfied, he can cancel his policy and take back the amount within the free-look period. Today, more than ever before, there is a fear of punitive action among agents. Thousands of agents have been terminated by the regulator during 2008-9 for various reasons. While the LIAFI is making its own efforts to address the issue of mis-selling by holding seminars and conferences, it is impossible to weed it out overnight. However, there is hardly any profession where mis-selling or mis-guidance doesn’t take place. Why is this being unduly blown out of proportion only in the case of insurance agents?
If mutual funds, which are also ‘push’ products like insurance, can survive without load, why can’t insurance?
It is improper to say that mutual funds are push products. Insurance sale is in no way comparable to selling mutual funds. Their marketing is done mostly by institutions, which have undergone a significant loss of business and are now resorting to paying the agents with their own sources using different methods. A month or so ago, a fund house ran a competition for which their pricing was much higher than the earlier commission of 2.25%. Mutual funds are going through tough times. The total assets under management have come down by Rs 1.5 lakh crore ever since the no-load regulation was thrust on them.
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