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Capping Insurance Commissions

Scrapping the incentive to mis-sell as well as remove disparity between insurance and other financial products is a must

It is unfortunate that the proposed reduction in insurance commissions is being seen in terms of the consumer vs the insurance industry. This is a narrow view that comes from the position that the seller and the buyer must be enemies because they are both competing for the same rupee. In reality, the end of the present commission structure will be a tremendous opportunity for the insurance business in India to reform itself. I see the reforms proposed by the Swarup Committee as the minimum that are needed to save India's insurance business from its own excesses. The insurance industry must realise that there simply isn't any other way forward. The business they are running now isn't insurance. It simply amounts to letting loose hitmen who will do anything to trap victims if the bounty is large enough.

There is simply no justification for any kind of financial service to deduct the kind of commissions that insurance agents earn. Recently, IRDA has made some noises against the high policy lapse rate. This lapse rate is evidence of a vicious cycle that customers are trapped into. Since agents make a huge chunk of money up front, they hard-sell high commission products that require a higher premium than customers can afford. The result is that the agent skims of his cream while the victim often misses his payments and loses massively.

While the Swarup Committee's recommendations on reducing commissions are bang on target, what is really admirable is the clear-headed connection that its consultation paper makes between high commissions and the mis-selling of insurance. High commission rates are not an isolated problem. It's not as if insurance holders are paying a high entry cost for what is otherwise a great product. Instead, the front-loading of high commissions practically guarantees that customers will be sold products that are harmful to their financial health. And sooner or later, a good chunk of the customers will decide to cut their losses and abandon their policies. Mis-selling is built into the current business practices of the insurance industry.

It is sad to see that instead of mending its ways and turning a new leaf, the insurance industry is trotting out the same ridiculous justifications for being allowed to continue these practices. We often hear that agents need high commissions because insurance is a long-term product. No one explains why every other product or service on this planet charges less from long-term customers, but insurance agents need to charge more. No one also explains why this charge has to be so massively front-loaded instead of being smoothly spread out through the life of the policy.

Another favourite argument is how the money flowing in from insurance provides employment, boosts the stock markets, protects us from FIIs, etc, etc. These sound like wonderfully patriotic goals, but they can hardly justify what is being done to customers. As an insurance customer, why do large chunks of my money have to be handed over to agents so that stock traders can be protected from FIIs, whatever that means.

Anyhow, insurance is something that a huge number of Indians need desperately. These reforms, if they can get past the gauntlet of insurance lobbyists, will probably re-orient the industry to fulfilling that need.