This has been the topic of discussion for some time now in Indian insurance scene. Understandably, with the 2008 recession and the financial crisis that followed, banks and insurance companies which were affected the most have started looking inward in terms of cutting costs. Distribution channels were the target. Most of the companies, especially in the emerging markets, incur heavy expenditure in setting up and running the distribution channels. It is these sales costs that are hurting the companies.
Its been a decade now with the liberalisation of insurance industry in India and one has witnessed a profileration of private insurance companies (with a 74:26 local-foreign joint venture). While increased competition has continued to drive down prices, expand product portfolios and shift focus on customer service, distribution and management costs have continued unabated. Indian insurance being agent-centric, commissions and agent fees constitute a major part of insurance companies' expenses.
The D Swarup committee on investor awareness and protection, formed by Govt., has come out with suggestions addressing the above mentioned issue on distribution costs. The panel suggests moving towards a commission less regime for financial products which includes insurance as well. The point to be noted is that commission is embedded in insurance products, where as the same is not the case in pension. Mutual funds too have incorporated the no-load structure. This would effectively mean a cut in commission to insurance agents, the bed rock of insurance distribution in India.
The panel plans to gradually phase out upfront commissions paid to agents and introduce a fee structure by April 2011. This has been met with a lot of opposition from life insurance agents and recently by IRDA as well. Agent's commission could be as high as nearly 15% to 20% of first year's premium paid by insurance buyer.
Eliminating commissions would result in insurance penetration suffering a setback and diminishing the role of agents. Insurance customers, urban and rural alike, irrespective of newer distribution channels such as bancassurance and internet sales, still prefer the agent route when it comes to life insurance.
The panel is now planning to modify its suggestions based on pure insurance products and ULIPs by alloting different regime of reducing/eliminating commissions.
It needs to be seen how the Govt. responds to this and if there would be any modifications in the final report.
Its been a decade now with the liberalisation of insurance industry in India and one has witnessed a profileration of private insurance companies (with a 74:26 local-foreign joint venture). While increased competition has continued to drive down prices, expand product portfolios and shift focus on customer service, distribution and management costs have continued unabated. Indian insurance being agent-centric, commissions and agent fees constitute a major part of insurance companies' expenses.
The D Swarup committee on investor awareness and protection, formed by Govt., has come out with suggestions addressing the above mentioned issue on distribution costs. The panel suggests moving towards a commission less regime for financial products which includes insurance as well. The point to be noted is that commission is embedded in insurance products, where as the same is not the case in pension. Mutual funds too have incorporated the no-load structure. This would effectively mean a cut in commission to insurance agents, the bed rock of insurance distribution in India.
The panel plans to gradually phase out upfront commissions paid to agents and introduce a fee structure by April 2011. This has been met with a lot of opposition from life insurance agents and recently by IRDA as well. Agent's commission could be as high as nearly 15% to 20% of first year's premium paid by insurance buyer.
Eliminating commissions would result in insurance penetration suffering a setback and diminishing the role of agents. Insurance customers, urban and rural alike, irrespective of newer distribution channels such as bancassurance and internet sales, still prefer the agent route when it comes to life insurance.
The panel is now planning to modify its suggestions based on pure insurance products and ULIPs by alloting different regime of reducing/eliminating commissions.
It needs to be seen how the Govt. responds to this and if there would be any modifications in the final report.
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