The present incentive structure allows high front-loading of agent commissions, rues Sanjay Tugnait, Managing Partner, Accenture Financial Services. “An agent is paid as high as around 40 per cent of premium for the first year for certain products, 7.5 per cent for the second and third years and 5 per cent for the following years. The proposed structure suggests that the upfront commission embedded in the premium paid be immediately cut to not more than 15 per cent of the premium, falling to 7 per cent in 2010 and nil by April 2011,” he adds, during the course of a recent email interaction with Business Line.
The reference is to the Swarup Committee’s recommendations, about investor awareness and protection, seeking to bring the selling of insurance products in line with mutual funds and the New Pension System. Mutual funds went no-load from August 2009 with the SEBI’s aim to make advisors the agents of customers rather than of the asset management company whose funds they sell, Tugnait reminds.
“The Swarup Committee has similar aspirations for proposing that the insurance industry do away with agents’ commissions and instead entitles agents to earn by way of fees – such that agents are reimbursed for their advisory service, instead of the guaranteed commissions, which by default put the onus on the quality of service provided by agents.”
Excerpts from the interview.
What is the need for this new incentive structure in insurance?
In general, the commission-based model is associated with agents while the fee-based model is meant for financial advisors. Objections to the commissions set up go back to the practice of mis-selling, which manifests as high churn rate and lapsation of policies along with customer complaints.
In a competitive environment – such as India’s, with new players and products launched every other day – the high front-loading commission structure is believed to lure agents to churn a policy thereby diminishing the motivation to service the policy in the longer run.
For example, the complex structure of ULIPs is difficult for many customers to understand and often ULIP products are bought with higher returns in mind. But many a time customers are sold ULIPs that are either ill-suited to their financial needs or the product features are not transparent enough. By changing the incentive structure to fee-based, the Committee aims to strike at the very root of inappropriate financial advice.
Why is there resistance to accept the recommended incentive structure?
To the average Indian, insurance is still sold and not bought, as the importance of an insurance product is not embedded in his or her mind. Some customers are aware of insurance but then more as an investment product and not a risk cover. Agents and other stakeholders have to spend a lot of time educating the customer to identify his or her intrinsic needs and generate interest to buy the product.
If insurance companies shift to a model where investors pay fees after negotiations instead of commissions, the lack of financial awareness of the Indian customer will be a deterrent and volumes will be hit.
The Committee’s recommendations of pure fee-based model will become relevant only when financial literacy rates in India increase to a level that people start purchasing insurance on their own. There is a large population in urban, semi-urban and rural areas that is still unaware and uninsured. Given that Indian insurance is an evolving market, the Committee perhaps could let the commission- and fee-based systems coexist for now, and move to a fee-based model at a later stage.
How are other countries handling this issue?
A few countries are in the process of adopting the fee-based structure. A recent example is the UK, which announced that it will move to a fee-based system from 2012. Australia too favours the fee-for model and provides for greater transparency in the sales process, as agents must declare at the start of the advice process what they will receive once the insurance sale goes ahead.
The European Union recently mandated for insurers to make the underwriting process more transparent and to explicitly show the costs for selling a policy that are imposed on the policyholders.
Apart from these regulations, increasing customer demand for independent advisory services is driving the market. In Germany for instance, the broker sales channel and the tied-agent coexist, though the tied-agent channel is historically more dominant in the life insurance business.
Insurers all over are experimenting on what works better. An interesting case is the Honorarkonzept in Germany. In May 2009, Belgium’s Fortis Group established this company to offer insurance policies without commissions as it found an increasing willingness of German customers to pay for quality advice. Other insurance providers can also sell their products via Honorarkonzept. But it’s too early to say if Honorarkonzept will prove to be an independent sales channel as intended, or will end up being a tied sales channel for Fortis products only.
On the whole, incentive structures in life insurance are dissimilar and evolving in different countries. There are successes and shortcomings in both models.
Is there no win-win solution then?
Looking at incentives alone may be a narrow approach. A holistic view is needed. As I mentioned earlier, the root of the debate on commission- versus fee-based incentive structure is the practice of mis-selling. Training and sensitisation of sales force to customer needs strikes at this root. As Indian customers gain financial awareness and their service demands increase, insurers will anyway have to prepare their agents for the eventual transformation to “advisors”.
The broader issue facing insurance companies is not that the need to cut or do away with commissions, but how they contribute to sales productivity and improve the agents’ call-to-conversion ratio.
For a vast majority of agents, the income from insurance is appallingly low which is also attributed to their lack of expertise. Insurance companies can enhance productivity for instance, by making it mandatory for all agents to take refresher courses to build product knowledge and soft skills in selling. Automation can effectively help insurers manage the sales channel. Investment in sales commissions systems, sales force administration, and tight integration into policy administration systems, will facilitate effective monitoring of the sales organisation.
Insights from customer channel, product and other data can be leveraged to inform strategies such as customer-agent segmentation and tiered service levels. Such insight, when fed back to the agent on time, contributes to informed decision-making at the point-of-sale and helps build relationships.
Is it really only about commissions? We need to reflect here. Instead of striking commissions, sensitising and training agents, industrialising product development and managing the overhead cost of servicing can be more effective in the revenue-versus-profit battle. A holistic view of sales and service optimisation will go a longer way than incentives alone in taking the Indian insurance market to the next frontier of maturity.