Pvt insurers not free to fix first-year commissions

Insurance Regulatory & Development Authority chairman, N Rangachary, has put his foot down on the issue of freedom for insurance companies to decide on the extent of first year agency commissions.
Private insurers have demanded the freedom to fix first year commissions, arguing that this is the practice in developed markets. They also said that in order to ensure that the selling team is professional, agents needed to be compensated enough so that they can make a living selling insurance.
"I would like to have an assurance that this would lead to a developement of the market without any increase in the rate of premium. Not one of the insurers has been able to give me such an assurance," Mr Rangachary said.
Therefore, he did not have any sympathy for their arguments, he added.
Speaking at a seminar on alternate channels of distribution organised by MarcusEvans in Mumbai, Mr Rangachary also indicated that the present system, whereby agents are tied to one company, would end in two-three years. This would happen even if brokers protested that the move will mean agents stepping into their territory.
According to Mr Rangachary, under the new rules for distributing insurance, an insurer would have to treat the commission paid for referral of customers as an acquisition cost and write it off in the year it was paid.
The amount that insurance companies can spend as referral fees cannot be more than one percentage of their annual premium. The annual premium would be the first year premium for a life company and gross direct premium for a non-life insurer.
The regulator has made it clear that if a bank or any other corporate entity gets a corporate agency licence from an insurance company, it cannot sell its database or enter into a referral agreement with a rival insurer.
The IRDA also issued a veiled warning to LIC for its high staff turnover. "We are trying to tackle this problem where with an addition of a couple of lakh agents there is an attrition of the same figure."
The regulator said that this calls to question important issues such as recruitment and training. Mr Rangachary said that insurance companies need also question themselves as to what advantage does this kind of recruitment bring to the system of intermediation.