Life insurance and mutual funds have been two large segments of the financial sector that have depended on agents and independent distributors for developing their business. Traditionally, the ubiquitous agent has been the first, and often the only, point of contact for the customer with the Life Insurance Corporation. Most often, a policyholder has very little interaction with the insurer beyond the periodic payment of premium. The LIC’s marketing strategy of relying heavily on its agents has served it well. Private companies, which re-entered the field, have designated their agents as investment advisers, consultants, and so on without altering their job profiles substantially. However, the number of advisers that the private companies deploy is small compared to the LIC. Development of alternative distribution channels has not diminished the importance of the agent. In return for mobilising business, these intermediaries are compensated through commission payments.
This traditional business model will come in for change if one of the key recommendations of the Committee on Investor Awareness and Protection headed by D. Swarup is accepted. In essence, it says insurance companies should stop paying commissions. The agents should charge their clients a fee for the advice given. Apart from pruning down the costs for the companies by saving on commissions, the idea behind the suggestion is to develop a higher degree of professionalism among the intermediaries. But it is doubtful whether a customer can be persuaded to pay for advice especially in a business where the agent generally passes on a part of the commission. The practice of rebating is both unethical and illegal but insurance companies and the regulators will need some more time to stamp it out. Doing away with commission payments has major livelihood implications for a large number of LIC agents. Most of them earn meagre sums for their work. The developments in life insurance follow those in the mutual funds industry. In June, SEBI decided that there will be no entry load — the commission investors paid — for all the schemes. The distributors shall be paid directly by the investors and not by the mutual funds. The insurance industry can take stock of developments in the mutual funds industry before implementing the Swarup Committee’s recommendation. Early indications are that the mutual funds are finding it difficult to distribute their products without the active support of the distributors.