Irda caps commission on limited-tenure policies

Mumbai: The insurance regulator has capped the agents’ commission paid by insurers for selling policies with limited premium payment tenure.

The Insurance Regulatory and Development Authority (Irda) said commission paid by insurers to agents selling policies with limited paying tenure should be 10-25 per cent of the first-year premium. The regulator specified the rate of renewal commission for such plans, where the premium paying tenure is lower than the policy term. The move is to discourage policies with limited tenure.

This is the first time the insurance regulator has capped the commission on traditional plans, which include endowment, money-back and term assurance plans. According to the Insurance Act, an insurance company less than 10 years old can pay up to 40 per cent of the premium as commission in the first year to an agent on traditional policies. Companies more than 10 years have first-year commission capped at 35 per cent.

In a recent communication to insurers, Irda has specified the first-year commission would be capped at 10 per cent for policies with a tenure between five and nine years. For the remaining term, the maximum commission payout would be capped at five per cent. For policies with a 10-14-year tenures, the maximum commission would be 20 per cent for the first year, 7.5 per cent for the second and third years and five per cent for the remaining term.

For policies with more than 15 years’ tenure, the regulator has suggested insurers offer a commission of 25 per cent for the first year, 7.5 per cent for second and third years, and five per cent thereafter. Earlier, a renewal commission was not specified by the regulator.

Irda has also mandated that any policy should have a minimum payment tenure of five years. “As insurance is a long-term savings product, the regulator is discouraging products with smaller tenure. Some insurers were giving as high as 35 per cent commission for policies with five-year tenure. Now for shorter tenure policies, the regulator has prescribed lower commission. This would act as a disincentive for agents,” said a senior official at a private life insurance company.

In September 2010, Irda capped charges and commissions on unit-linked products (ulips). As a result, the average commission in ulips as a percentage to premiums collected fell to four per cent in 2011-12, from nearly 10 per cent in 2009-10. Whereas, the average commission in traditional plans as a percentage to premium, which was 8.5 per cent in 2009-10 for the private sector; increased to 12.5 per cent in 2011-12.

“While the average first-year commissions in ulip has shrunk to five to eight per cent because of the cap in commissions, in traditional plans it can go up to 40 per cent. Hence, agents were also pushing traditional plans,” said another insurance official.

During 2011-12, life insurance industry’s policy issuance was down by eight per cent, whereas for the whole private players industry it was down by 24 per cent. As a result the first-year premium collection of life insurers, was down by nine per cent to Rs 1,14,233 crore against Rs 1,25,826 crore in the corresponding period last year. Traditional policies accounted for roughly 60 per cent of the premium.