By now, it's almost a truism that most insurance business in India is little more than a scam on customers and regulator IRDA never manages to close more than a small number of loopholes that this industry uses to bleed away investors' wealth. Therefore, the new draft rules on commissions that the regulator revealed a few days ago didn't come as much of a surprise. These rules raise the maximum remuneration payable for selling term insurance to a possible 70 per cent of the first year premium. By itself, commission as high as this sounds like a terrible idea.
However, when high commissions are paid for a term insurance plan, I find that I'm not able to summon the outrage that one does for ULIPs and traditional plans. It's true that high upfront commissions incentivise sellers to churn client's holdings and reduce their returns. However, the same logic doesn't apply to term insurance. Term insurance is not an investment, there are no returns. It's just a service, and fairly simple one at that. You pay a certain amount and you get a certain protection.
Agents would be hard-pressed to convince clients to stop one term plan and switch to another unless the deal was clearly better, as in more protection or lower premium or both. And if there really was such an advantage, then by all means, let the churn happen and the agent earn the commission. There are almost no hidden variables in a term plan so unlike ULIPs and traditional plans, it's hard to fool customers into harming their own interests.
Moreover, incentivising intermediaries to actively sell term insurance really is the need of the hour. If the new commission structure makes intermediaries less inclined to steer customers away from term plans, then surely that's a good thing.
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