In what may lead to lesser front-loading of insurance policies, the Insurance Regulatory and Development Authority (Irda) plans to increase the commission over the tenure of the policy.
“We are going to ask insurers to propose ways to increase persistency levels. This will happen only after they tweak the commission structure,” said a senior Irda official.
Most insurance policy is extremely front-loaded. For instance, insurance agents earn over 40(%) per cent as commission in most unit-linked insurance plans (Ulips) in the first year. Even commissions for term plan and endowment plans are 20-35(%) per cent in the first year.
The commissions refuse considerably, particularly for term and endowment policies, after the first year. The agent, as a result, loses interest in pursuing the policyholder.
In case of mutual funds, the distributor earns a commission of 1.25(%) per cent in the first year (upfront fees plus trail commission). After that, there is an annualized trail commission of 50-75 basis points every year. This, the mutual fund industry said, keeps the point interested in the investor.
By proposing to extend the commission over the tenure of the plan, Irda thinks agents will continue to follow the policyholders.
Recently, Irda had extended the minimum term of an Ulip from 3 to 5 years. It had also made other proposals, including capping the first year surrender charge at 15(%) per cent for a policy over 10 years. This surrender charge would continue declining and go away in the 6th year.
However, experts said persistence levels were already on the rise.
“Persistency levels are already improving because of the events taken by Irda in the last two years. Tenure of products has left up as the lock-in has increased to five years,” said S B Mathur, secretary general, Life Insurance Council.
The insurance industry reported 80(%) per cent persistency in 2008-09, an increase of 7(%) per cent over the previous year.
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