New Ulip norms may throw 1.2 million agents out of work

Mint 3/9/10 Anirudh Laskar & N. Sundaresha Subramanian

Reduction in charges to benefit policyholders, but will bring down agent commissions from 15-17% to 7-9%

Nearly three-fourths of the 1.6 million agents working for private life insurers are set to go out of business, as insurers are taking steps to cut costs in the wake of a dramatic reduction in charges of unit-linked insurance policies, or Ulips, by the insurance regulator. The new norms, which may push 1.2 million agents out of work, took effect from 1 September.

Ulips, a hybrid product that combines insurance and equity investment, account for at least 80% of new business premiums for life insurers.

The size of the agency channel, which sells policies of 23 life insurers, has grown from 900,000 to about three million in a decade. Until recently, agents were aggressively pushing sales of Ulips, earning commissions of up to 40%.

Life Insurance Corp. of India, or LIC, the state-run insurance behemoth, alone manages at least 1.3 million agents. There are about 310 million policies in force, including traditional life insurance policies.

The insurance regulator has capped various charges including surrender charges. Till 31 August, companies were able to levy up to 100% as surrender charges from a customer if a policy was discontinued.

The regulator has also ordered insurers to offer a minimum guaranteed return of 4.5% on the fund value in linked pension plans. Earlier, there was no such norm and the value of the funds invested entirely depended on the yield of the instruments where the premium was allocated.

The new norms will benefit policyholders but will bring down average agent commissions in Ulips from 15-17% to 7-9%.

Though the new rules will benefit policyholders, reduce first-year agent commissions and help curb rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.

“With the change in distribution norms, 75% of the agents will earn less than Rs10,000 a month. They will hardly bring any meaningful business to us. They are most likely to either quit on their own or we will ask them to leave,” said the chief executive of a large private sector life insurer who did not want to be identified. Currently, such agents earn nearly Rs20,000 a month.

S.B. Mathur, secretary general, Life Insurance Council, the representative body of Indian life insurers, went one step ahead: “About 75% of the agents are not productive. They just sell one or two policies and go away. What is the use of having them?”

LIC may not need to resort to cost-cutting measures due to its highly profitable business, but private sector insurers are planning drastic cost-cutting measures to sustain their businesses in the new regime. Cutting the agency channel is only one of several cost-cutting measures. The firms also plan to cross-sell products through branches of associate companies instead of opening new branches, cut commission of agents retained, and redesign new products with variable premium.

The companies are also focusing on alternative distribution channels such as subancassurance, where the expenses are lower. According to industry estimates, the cost of sales through bank branches or bancassurance can be as low as 20% of the value of the policies sold.

Though a bulk of the sales for some private players comes from bancassurance, overall, nearly 80% of policy sales in the life industry comes from agency channels.

LIC recorded a surplus of Rs23,500 crore in fiscal 2009-10 but most private life insurers continue to be in the red.

According to a recent study of consultancy firm McKinsey, existing distribution channels are almost entirely focused on Ulips. Nearly 85% of new business premium comes from sales of Ulips but the cost of sales through agency channels is very high—between 50% and 100%.

The study said the cost should be brought down to 25-30%. It also revealed that nearly 60% of the agents work part-time.

To save costs, private players are also focusing on training facilities to improve agents’ productivity. Some bank-owned life insurers are planning to sell insurance policies through the branches of their mutual fund subsidiaries.

LIC is setting up a separate wing for training agents. “Once this happens, agents can be trained on focused marketing strategies, where they will work on a select seven-eight products at a given time rather than going to the customer with 50 different products,” said Nilesh Sathe, executive director-marketing, at LIC.

N.C. Upase, a member of the chairman’s club of agents, LIC, said private sector agents are the worst affected. “Earlier, they used to be earning 25-40% commission. Now they won’t get more than 7-8%. This means their monthly income would come down by 60-70%.”

The chairman’s club of LIC is an exclusive group of agents who sell policies worth more than Rs1 crore in a year and have at least 550 life insurance policies in force for three consecutive years.

Upase said LIC agents may not face much trouble since they were earning much less, about 7.5%. “There are no major changes in LIC policies, except that the allocation charges are now distributed over five years. Agents would continue to get same commission,” he added.

Consultants are convinced agency sizes have to be trimmed. “The insurance industry cannot continue with the current costs. It needs to build a focused agency force. Companies must bring down the number by 30-50% at least, depending on their individual cost structures,” said Joydeep Sengupta, managing partner, McKinsey and Co. Singapore Ltd. Though the life insurance industry has grown to its current levels on the back of agency channels, this distribution channel is the most expensive of all other channels.

“Due to higher-than-expected expenses the companies have failed to attain a breakeven so far. The persistency ratio too is as low as 10% in some cases. This has to be improved,” J. Hari Narayan, chairman, Insurance Regulatory and Development Authority, or Irda, said at a conference in Mumbai on Wednesday.

The regulator has so far cleared 51 of 68 new Ulips filed by insurers. There were 230 Ulips in the market till August.

India’s life insurance industry has grown some eightfold in the past decade, collecting a total premium income of Rs2.61 trillion in 2009-10, or which nearly Rs1.1 trillion came from Ulips. At least 310 million life policies are in force now.

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