28 Apr 2010 IRDA
MUMBAI/NEW DELHI: Life insurance firms will now have to spell out to customers the commission they pay to agents on each policy.
The insurance regulator has told insurers to disclose explicitly the commission in the `benefit illustration’, a document that contains the benefits due to a policyholder upon maturity of an insurance policy.
A signed copy of the illustration along with the proposal form is mandatory for issuing a policy. In a circular to all life companies, the Insurance Regulatory and Development Authority (Irda) said companies will have to disclose the commission paid to agents with effect from July 1, 2010.
The regulator said this will bring about enhanced transparency by providing prospective policyholders the exact amount of commission/brokerage paid by insurers.
The circular is seen by life insurers as a fallout of the tussle between capital market regulator Sebi and Irda over regulating unit-linked insurance plans (Ulips), which have emerged as the hottest investment product in recent years.
Most insurers feel that Sebi has attempted to regulate Ulips after mutual funds complained that the bar on agent commission put them at a disadvantage to companies offering products similar to mutual funds. Irda’s latest directive could strengthen the case for life firms when the dispute reaches the courts.
The Irda move comes seven months after Sebi’s ban on entry loads on mutual funds took effect. Entry loads essentially arise out of commissions paid by mutual funds and the ban on loads effectively stopped them from recovering the commission money from investors. The decision also comes less than five months after the Reserve Bank of India (RBI) asked banks to disclose the commission on policies sold by them.
Insurance companies have resisted this move all along. However, in November `09, RBI forced banks to disclose the commission they receive for policies sold by them. “If you buy soap, the shopkeeper does not disclose what he earns on the sale. Why should it be any different for life policies,” said the CEO of a life company when questioned on disclosures.
However, of late, a section of the industry has come around to the view that such disclosures would be inevitable, particularly after the Irda-Sebi spat over Ulips and lobbying by mutual funds over high commissions paid on these products. “We welcome this move and look forward to working with Irda on disclosures. We also feel that the time is ripe for legalising rebates,” said a spokesperson for Bajaj Allianz Life Insurance.
“We are maturing as an industry and this will further help establish insurance products as a viable long-term investment option,” said Rajesh Relan, managing director, MetLife India Insurance Company.
Life insurance companies said the immediate impact of the disclosure would drive many insurance agents to rebate commissions. Although rebating commissions, giving back a slice of the money to policy buyers, is illegal, a large section of agents has been passing on commissions collected under traditional policies.
But after the life industry shifted to Ulips, rebating of commissions had come down as policyholders were given the impression that most of the premium was going into their account.
Internationally, rebates of commission are allowed and in many countries an agent can claim tax relief if he uses part of his commission to pay premium on behalf of his client. In India it is not possible for the regulator to allow commissions as this would require an amendment to insurance laws.