Life Insurance - Impact of new recommendation on Consumers

The proposed change in the report of the Committee on Investor Awareness and Protection could potentially bring about a sea change in the way life insurance is sold to customers today. They have recommended that insurance companies should ask their agents to charge their clients a fee for their services instead of getting a commission from the insurance company. Chairman of the committee, D Swarup has proposed the elimination of the upfront commission by April 2011.

The recommendations of the six member committee that included members from the RBI, IRDA, SEBI and the ministries of finance and corporate affairs are in line with changes happening abroad and in India to move to a "no load" / zero commission model. Australia has already implemented the same while UK is looking at implementing it by 2012. Recently SEBI implemented the same changes within the Mutual fund sector where they removed the concept of an "entry load". Currently the commission structure is around 16.25% of the premium.

Consumers however are sure to benefit since the incentives of life insurance agents will be more aligned to customer interest. Currently the life insurance agent pushes an insurance policy without bothering about whether the customer can actually afford to pay that kind of premium year on year and their ability to maintain the same.

The consumer is also unaware about the risks and costs associated with different kinds of insurance policies. Since the agent is only looking at earning his commission they focus more on their narrow interests rather than servicing the customer and actually tailoring a policy to suit the customer´s needs. Now that they may have to earn their income as a fee from the customer the quality of service they offer will be critical to ensure regular income from their customers.

As expected life insurance agents are up in arms about the changes since it directly threatens their livelihood. Just the income on commissions for the last financial year was around Rs. 15,000 crore. There has been ample criticism of the recommendations across insurance agents, insurance companies and the IRDA commissioner. The recommendations may be watered down or altered and a compromise reached but the customer still stands to benefit.