This is what insurance agents earn
NEW DELHI: High commissions, rewards and opaque structures have meant that intermediaries have often embezzled traditional insurance and cum investments. The promised rewards are an incentive to sell products that generate high commissions and do not necessarily fit the needs of the insured. “These rewards are paid above commissions for the objectives achieved. These could be in the form of sponsored vacations, appliances or even clothes, explains financial planner Pankaj Mathpal, founder of Optima Money Managers.
Until now, life insurers showed commissions and rewards separately. That is set to change. “These rewards were generally disclosed as part of the general operating expenses. Now, they should be disclosed according to the commission schedule. The purpose is to achieve uniformity in the disclosures, ”says Ramandeep Singh Sahani, CFO, Bajaj Allianz Life.
The new rule book
Now, the Insurance Regulation and Development Authority of India (Irdai) has ordered insurers to show such rewards and remunerations paid to agents, brokers or other intermediaries under the main commission in their financial statements.
The objective is to ensure consistency, uniformity and fair presentation. Rewards and/or remuneration to agents, brokers or other intermediaries will be shown as part of the main commission in the financial statements. The rewards will be shown as a separate item in the Annex 2 commission, below the net commission in the financial statements, the insurance regulator recently decreed.
Irdai allows insurers to pay rewards of up to 20% of first-year commissions to distributors whose non-insuring intermediary business income does not exceed 50% of their total income in one year. The idea is to reward agents who depend primarily on their agency's business for their livelihood, and not institutional distributors such as banks.
While insurers have always been required to disclose rewards, the new rule will make it easier for policyholders to understand the payment structure. “A layman may not understand the essence of financial statements and disclosures. Now, total payments, including commissions and rewards, that are made to intermediaries can be seen in a single schedule, says Anilkumar Singh, actuarial officer, Aditya Birla Sunlife Insurance. Now it will be easier to calculate the percentage of payments.
However, remember that Irdai's movement will not affect your returns in any way. These are related to the disclosures and will not affect the internal rate of return of the product for the insured, says Sahani.
This is similar to Sebi's rules for the disclosure of the remuneration paid by asset management companies to their mutual fund distributors. The definition of the market regulator's commission covers direct monetary payments, as well as payments made in the form of gifts/rewards, travel and event sponsorships.
“The rewards for insurance intermediaries are covered by Irdai Compensation to intermediary regulations (2018). The nature and amount of such rewards are closely related to commissions and, therefore, disclosing them under the main Commission is more natural, says Mandeep Mehta, executive vice president and financial vice president, Max Life Insurance.
Transparency in disclosure will help policyholders to evaluate an agent's recommendation in the context of the incentives to which the latter is entitled. It is important that the insured knows the total amount the agent can earn by selling the policy in a single section, says Mathpal.
However, he points out that clarity about the amount of rewards could tempt some policyholders to demand a return, a bad practice that implies that the agent transfers a portion of his commission to the former. The insured, meanwhile, should refrain from requesting reimbursement and focus on determining whether the product meets their needs or not, he adds.
Disclosures about expenses
Irdai has also tried to achieve uniformity in management expense disclosures (EoM) incurred by insurers.
EoM represents the total expenses incurred by insurers, including administrative, operational and commission-related expenses, among other things. “Some insurers present operating expenses in the income account (account of the policyholder), net of excess EoM beyond the allowed limits. This does not present the position of overdraft of exact expenses of the insurers ”, said Irdai, when establishing the rules for the presentation of these expenses.
In a nutshell, some insurers charge expenses that are beyond the limits allowed in the shareholder's account. Now, they must first charge the same to the policyholder's account. The equivalent amount will be transferred from the shareholder's account to the policyholder's account, says Singh. This must have been a demand from investors and analysts to understand the total expenses incurred by companies for sales and administration, say industry observers.
While it is largely a step to standardize accounting practices and does not affect returns, greater transparency is in the interest of policyholders and investors.
“The circular is a positive step to standardize the presentation of expense reports by insurers. This is an improvement of disclosures that will not affect the financial results of insurers. The improved disclosure will allow the insured to know how much of the deficit towards the MOE has been financed through the shareholder's account, ”says Mehta.