Exclude agent commissions from premia

Report says mis-selling by financial advisers promotes interests of life insurance

Mint 3/9/09

Insurance buyers will no longer have to foot the bill for agent commissions, if the government accepts the game-changing recommendations of a committee headed by D. Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA).

The six-member committee also recommended that the government set up a Finance Well-Being Board of India (Finweb) to establish common minimum standards for financial advisers and to increase financial literacy in India. The committee’s consultation paper was placed on PFRDA’s website on Wednesday.

The current system of sale incentives encourages insurance agents to tailor advice in such a way that it promotes the interests of the life insurance industry rather than the insurance buyer, Swarup said. India’s life insurance industry collected annual premiums of over Rs2 trillion in 2007-08 through sale of new policies and renewals.

These suggestions come a month after the Securities and Exchange Board of India asked mutual fund companies not to load their distribution costs on investors.

Current rules allow insurance firms to deduct as commission up to Rs40 of every Rs100 paid by policyholders as first-year premium. Insurance firms invest only the residual amount on behalf of the policyholder. In the second and third years, firms can deduct up to Rs7.50 for every Rs100 premium and a maximum of Rs5 thereafter.

The Swarup panel’s recommendations are designed to combat rampant mis-selling of financial products in India, a result of skewed incentives in the distribution chain for financial products. Mis-selling by India’s three million financial advisers can harm the interests of about 188 million investors, the report said.

Separately, insurance regulator, Irda (Insurance Regulatory and Development Authority), has in its 2007-08 annual report termed “lapsation” of life insurance policies as a “major bane”. Lapsation happens when the policyholder prematurely stops paying premium for any reason, including being sold an unsuitable policy. In 2006-07, 8.6 million life insurance policies lapsed, the Irda report said.

According to the Swarup committee’s consultation paper, when financial incentives for agents are loaded on to a financial product and thus borne by the investor, for all practical purposes the agent functions as an adviser. Therefore, changing the incentive structure for agents strikes at the root of inappropriate financial advice.

Financial advisers are spread across segments of the financial sector, each of which has an independent regulator and legislation.

The Swarup committee’s recommendation on the legislative backing for Finweb would not trespass into existing laws. “What we are suggesting is a coordinating model and preventive measures,” Swarup told Mint. The finance ministry would invite all stakeholders for a meeting next week to get their view, he said.

Gautam Bhardwaj, head of consultancy Invest India Economic Foundation, who has worked on pension markets, agreed with the broad principles of the Swarup committee’s recommendations on financial incentives. He, however, felt the implementation of the recommendations would have to be done cautiously.

According to Bhardwaj, with just about 3% of India’s population falling in the income-tax bracket (a minimum annual income of Rs1.6 lakh), reforms on removing financial incentives have to be paced in a way that would ensure insurance agents continue to have the motivation to reach out to potential customers capable of paying only a small premium.

It is important to ensure the distribution does not withdraw from sections of customers it might consider unattractive in the absence of embedded loads on premium, he said.

The central role financial incentives play in distribution of retail products have made the Swarup committee suggest the legislation backing Finweb be built on a platform of reforming the incentive structure. On this platform, the committee wanted the legislation for Finweb to be principle-based as against the current rules-based system followed in India.

The report described principle-based regulation as one where the regulator articulates broad principles and allows market players to innovate around them. In rules-based system, regulators use a checklist to see if market players have complied with the law.

A government panel recommending principles-based regulation in the financial sector is not new in India. A report which recommended ways to convert Mumbai into an international financial centre said the same thing. Ajay Shah, an economist at the National Institute of Public Finance and Policy, who was a part of the resource team on the Mumbai report, said the Swarup committee’s emphasis on principles-based approach was “bang on track”.

Our Comments: Entry Load’s on Mutual Fund investments were recently banned, and now the same may happen on Insurance front. We feel the concept of selling is coming to an end and the concept of advisory is beginning… what do you feel? Click the comments link to write the views.


17 thoughts on “Exclude agent commissions from premia

  1. Dear Sir,
    Change is required everywhere, but what is the cost of change, more than 1,20,00,000, people’s life is involved in this changing process,Afterall If you are thinking of changing of future of financial products by removing inbuilt comission in the structure.why cont you think bringing swiss bank black money, why cont’t you think corrupt politicien’s, why con’t you think of corrupt babu’s, why con’t you think Inbuilt employees salary to run the system,

    Eventhough if the bill is passed can you give assurance companys will perform,what is the gurrantee,


  2. A second solution is that selection of Advisor,now every insurance company appoint any one who is 10th or 12th pass,how can a such person underwrite individual health,financial position
    risk etc,many of us selling financial products like vegitables,so
    problem lies here and insurance companies also want that any how
    to increase there nos.,it almost truth that one becomes insurance
    agent when he has no job to do.Just like insurance agency is given not taken.


    • all insurance agents are certified and licenced by IRDA and if the agents are not of good quality IRDA should take steps to improve the quality insted of that they are stoping their earings. If some of the agents are misselling the products why all agents have to suffer. There are enough people in other professions doing wrong things does it means all the proffessionals should be thrown out of their proffession?
      Today everybody is talking of proffessional advisory services and fee based services and advising to become CFPs and charge fee for the advise. As of now there are about 700+ CFPs in INDIA but yet I have not met any CFP, who is making a living independently by practising as CFP as there are hardly any body (among small investors), ready to take their services for a fee – So what is the future of financial advisory services?


  3. I think if SEBI can make all the financial products available at grocery stores or malls as any comodity and it will save all the expences for the investor as no certified distributor or advisor or agent(whose earnings are hurting and their hard work is seen as cheating by the great honerable SEBI chairman and PFRDA chairman) is involved in the process and all hard earned money of the investors can be saved(?) is int it a grat IDIEA mr swarup/Mr Bhave?


  4. May be making everyone to enter into the equity market may be the ultimate aim of the SEBI. But i have one more suggestion for them.

    We are paying a brokerage commission for investing in equities and an account maintainance charge for the DMAT account.

    If SEBI is looking for the protection of the retail investor why don’t they provide an option for investors to purchase directly from the stock exchanges (like BSE, NSE….) so that no need to pay a brokerage commission for share broking firm? The stock exchange can themselves allow people to open accounts with them like bank accounts and people can trade in that. We can pay the account maintainance charge alone to the stock exchange directly.

    SEBI should give a serious thought about this.


  5. The recommendations by Mr Swarup are still in early stages.How the Incentive structure for the agent or advisor is being worked out needs to be seen.But unlike Mutual funds,Life & health Insurance is seldom bought with the same enthusiam in India.This has not changed since LIC was formed in 1956 nor IRDA & subsequent privatisation of the Industry.Although there may have been a marginal increase in the penetration levels as compared 50 yrs ago,the value selling concept of Life Insurance hasnt come out of it’s shadows often resulting in a buyer’s remorse over the product bought followed by the policy lapsation.The committee should focus more on educating the investor on the need of Life Insurance at every stage of life & pension income in old age.This can be done by IRDA/PFRDA circulars,advertising in Media.Also the importance of an Insurance agent may be highlited in such campaigns which can encourage more individuals to join the industry & promote healthy competition.Sitting in an Ivory tower & passing judgements may ruin the already rigid Insurance mkt.In a nutshell Life Insurance is rarely bought in India,it’s allways sold.A concept or product which is rarely bought over the counter or the internet needs to be rewarded proportionately with commission & incentives,since it needs that EXTRA effort & personalised skills on the part of the intermediatory,goes without saying.Therefore before deriving any alternate model for the incentive structure with the lame excuses of misselling by agents,the ground realties of the Indian Insurance Mkt need to be taken into A/c very seriously by the D.Swaroop committee.Just resorting to populist measures like banning or drastically reducing the agents commission & taking cudgels on the part of the customer in the name of Investor interest would not help the cause of promoting Insurance awareness,on the contrary would rather lead to it’s decline & loss of BREAD & BUTTER for millions of LIFE INSURANCE AGENTS who have consciously opted for this career out of PRIDE & SELF RESPECT.


  6. Sir

    Financial advisor (insurance agents) are not cheaters they help middle class families to secure their future. Nobody does charity work so for them commission is paid for the sweat they shed in the field. Instead of stopping the hard earned money work on exploitation of (bribe) common people by government officials and politicians


  7. I think we have to send flowers to SEBI Ex-chairman Mr DAMODHARAN, SEBI CHAIRMAN MR BHAVE and PFRDA chairman D. Swarup, for doing eliminating Independent Financial Advisors comunity from INDIAN financial market. well done if you can not help people finish them so that nobody will raise their voices
    Keshav B Bhat







  9. I think we should support this idea about removing the commission from the insurance policies as it is hard earned money of Indian people.


    • well said mr GOYAL I think all of us have to work without any wages as even employers are also giving salary from their hard earned money. If you have any domestic servants why you have to pay them because it is your hard earned money. why you have to pay for anything? after all it is your hard earned mony and only you have the right to keep it.


  10. Entry load ban on mutual funds and making advisors as real ‘Advisors’ may be a good decision. But implementing the same in the insurance industry seems to be a bit in-appropriate.

    In the advertisements you may put it in way like “Insurance is a matter of solicitation”; but the fact is insurance is never bought – it has always been sold and it will be the same in future i believe.

    Removing the commission method and putting an advisory model into the system may not work well with the insurance industry. The developed countries which are blindly followed by SEBI for implementing new regulations are still following a commission based model in the insurance sector. But this may be a good chance for the insurance companies to get to know the power of field force as the mutual companies who has learn this off-late.

    Now SEBI is planning to provide a platform for all the mutual funds as exchange traded one to provide more liquidity. NOW may be SEBI is trying to control the entire financial sector in the country.

    Only the time can give answers for all the questions!


    • About exchange trading platform for MUTUAL FUNDS, if a person is having enough time to study and trade without leaving his present job/proffessional work why he or she has to invest in MF schemes and pay fund management charges to AMCs, they can invest directly in shares and earn highest retuns also save on the fund management charges


      • May be making everyone to enter into the equity market may be the ultimate aim of the SEBI. But i have one more suggestion for them.

        We are paying a brokerage commission for investing in equities and an account maintainance charge for the DMAT account.

        If SEBI is looking for the protection of the retail investor why don’t they provide an option for investors to purchase directly from the stock exchanges (like BSE, NSE….) so that no need to pay a brokerage commission for share broking firm? The stock exchange can themselves allow people to open accounts with them like bank accounts and people can trade in that. We can pay the account maintainance charge alone to the stock exchange directly.

        SEBI should give a serious thought about this.


  11. This all started with Dematerialisation of equity shares some 5 years back which was a great boon to the investors accepted. But at that time it was also told by Sebi that in the next few years the retail participation level in the equtiy market will increase multifold but sadly it is still around 3-4% level only.

    Next came the recent No Load order on Mutual Funds by Sebi. It is a well known fact that the penetration of mutual funds is also around 3-4% only.

    Now it is the turn of Life Insurance here too the penetration is onlyl 5-6%.

    Not to mention about the recently launched National Pension System the sales of which has been pathetic.

    Lots of regulation changes are happening in the financial field, but the government agencies do not take enough effort to educate the lay man.

    Advisory or selling or buying of financial products will be fruitful only when the culture to invest is spread across. So instead of cutting the earnings of the advisors/distributors i think the government agencies should start concentrating on educating the investing public.


  12. first it was Mr Damodharan second Mr Bhave and now it is Mr swarup, I woder what they are up to they sit in the A/C rooms make merry in five star hotels and take home hefty salaries but do not realise the imporance and the hard work of financial advisors role in the life of common man and small investors. They only think all financial advisors are cheets and receive commissons without doing any work. I wish they come out and work as financial advisors attending lower middle class people to realise see the financial advisors role and life. I wish people like Bhave and Swaroop should rot in the the old age home when the retire and then only they realise how many hardwoking people and their families they have made to loose their bread. Once I met a old man travelling in Mumbai local train, he was weeping and saying he was a chief engineer in MTNL and retired now for more than six months he is running piller to post to get his pention- the people who visit the MTNL office to solve their problems will understand why this man has to suffer in his old age. Mr Bhave and Mr Swaroop remember you too have to pay in this same world for your sins


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