New ULIP norms: LIC seeks not to tinker with agents' commission

LIC is not going to reduce agents' commissions according to IRDA guidelines

-Businessline 7.7.2010
Life Insurance Corporation of India may not reduce agent commissions while restructuring its unit-linked products to meet the insurance regulator's new guidelines.

With 90 per cent of new business for the corporation coming via the agency channel, any tinkering with the commission structure could affect the business of the country's largest life insurer. So, the corporation may look at absorbing the commission costs into its books, said Mr D. K. Mehrotra, Managing Director, LIC.

Typically, insurance companies pay an upfront commission of 30-40 per cent in the first year, which comes down to 5-10 per cent from the second year.

The Insurance Regulatory and Development Authority has asked life insurers to evenly distribute the charges on unit-linked plans over a period of five years (say, 10 per cent commission every year). Insurers fear that squeezing agent commissions will reduce business for them.

LIC hopes to get over this by continuing with the current commission structure and by taking the costs on to its own books (to be adjusted later annually).

The corporation did something similar the last time a cap was set on charges. “We had tried to squeeze in the charges and did not touch the agents' commission. We will see whether we can do it this time also,” said Mr Mehrotra.

However, he admitted that it may not be that easy this time around to leave agent commissions untouched; the corporation would have to rely on volumes to compensate for the lower margins that would result.

“It is going to be difficult this time. We have an advantage on the volumes side. If the volumes keep on coming to me, I can tweak the products such that I don't touch their commissions,” he said.

The corporation has a 14.5-lakh strong agency channel.

“Initially, there will be an impact if commissions are reduced. If you don't pay commission, why will people work? We are still trying to see how best to structure our products…what are the expenses that we can absorb and what we would have to pass on,” he said.

Currently, ULIPs constitute 65 per cent of LIC's total sales. After the new regulatory changes, selling ULIPs will not be as easy as before and as a result sales will fall. The ideal mix of ULIPs and traditional policies will be 60:40, Mr Mehrotra said.

However, for private life insurers, leaving agent commissions untouched may not be a viable option.

“LIC has huge volumes. They can afford to do it though will not be easy even for them. We (private insurers) will not be able to absorb all the reduction in charges onto our books. We will have to pass it on. LIC is more dependent on its agency channel. But most of the older private players have a well established bancassurance channel,” a private insurance company CFO said.

Source: http://www.thehindubusinessline.com/2010/07/07/stories/2010070753730100.htm