To Be or Not To Be..

‘To be or not to be….. that is the question,’ said Hamlet. A similar question is being asked in the non-life insurance industry in India today — ‘ To show or not to show……. ‘ . Show or not show what? The insuring population which is miniscule and the uninsured which is in a majority, both wouldn’t care less. This debate is on between a few select insurers and select distribution channels such as agents, brokers and web aggregators. Again, banks as distribution channels are least bothered by this question as they know that their financial and compliance interests will be protected by the insurers. The point debated is whether the commission/brokerage payable to the distributing intermediary should be displayed on the face of the policy.

What is the reason cited by the intermediaries for not displaying the commission earned? Their fear is that if their actual earnings are displayed on the face of the policy, insureds may start demanding a portion of it in cash, as is widely prevalent ( or should I say, the standard practice) in the life insurance industry, more particularly among LIC agents.

What is the reason cited by the insurers ( a few of them) for the need to display the commission? The single word — Transparency. The end-customer should know how much is the intermediary earning under the policy.

Let us look at both sides of the argument. Is the fear of the intermediaries justified? To a large extent, Yes. Not that policyholders today are not aware of how much the intermediary earns, they have a fair idea. Moreover, the Code of Conduct for insurance brokers stipulates that if a client asks the broker what his earning on that deal is, he is bound to disclose the same. So what is the fuss about? Clients would not mind the intermediary his earnings as he provides a number of value-added services such as understanding their risks, suggesting risk management measures, a suitable insurance program, choice of insurers, scrutiny of policy wordings & above all claims management. Let us face it — Insurers have been paying and intermediaries have been receiving payments for distribution, over and above the commissions mandated by regulations. If and it is a BIG IF, the actual payments made are disclosed by the insurers on the face of the policy, policyholders’ eyebrows may be raised. They may start wondering, if there is such a huge margin built into my premium, how come my premium is not reduced by the insurers. If that is not done, an indirect way of achieving it would be by asking the intermediary to part with a portion of his earnings. Will the insurers reduce premium? No way. Secondly, the doubt in everyone’s mind is, will insurers diligently report the commission earnings for all intermediaries without exception on the face of the policy? Or will they resort to displaying a small portion and paying the rest by other means, as is being done now, for select intermediaries? This certainly is a point of concern as Banks seem least perturbed by these developments. They have a lot of skin in the game, basis their Bancassurance tie-ups with insurers and some of them having insurance companies in their promoter groups as well. It is a known fact that attachment/embedded products are high-priced, it is a sort of force-sell/mis-sell and yet, the payouts for distribution are among the highest. Reasons often quoted by insurers is the very favorable loss-ratios in the customized products. If that be so, is there not a case for displaying the loss ratios to the end-customer and reducing premiums in a transparent manner?

It is quite apparent from the above that the insurers’ argument of transparency to the customer falls flat. Question is why this sudden love for the customer and the need to display the distribution costs to him in a transparent manner? One, is an implied statement that they( insurers) have not been transparent so far and have been paying intermediaries more than mandated by regulations. So, it was not love for the customer but lust for topline and business valuation which drove their decisions. The lust is still there but the heat from the compliance standpoint is catching up and hence the need to make a change. Make no mistake, customer’s interest is nowhere close to being the reason for this proposal. A very simple point — an intermediary may demand the moon, but unless there is an insurer willing to offer it, the intermediary will not get it. Can not all insurers decide that they would not pay anything more than the regulated commissions? No, each one is afraid that the other may offer something more and lure away the distributors, especially the smaller insurers and the expected newcomers. Hence this suggestion of displaying commissions on the face of the policy by a few insurers.

Is there a case for reduction in commissions to intermediaries, by whatever name called? This needs to be looked at closely and compared with the huge fixed costs involved in creating a direct distribution team or a technology platform which can take the world by storm. The larger distributors certainly spend a lot of money on trained staff, technology and reaching out far and wide, all of which will have to be otherwise incurred by the insurers for distribution. If some insurers feel the costs are shooting up, they can well sit down and discuss with intermediaries on ways and means to moderate them. Instead, it appears they are firing from the shoulders of the innocent customer, citing Transparency, in the hope that this will bring down distribution costs. Follies of their own making in promoting consolidation by distributors is coming back to hurt them. Karma, you know.

Regulator has set the expectations clearly — 1) Enhanced penetration 2) Reduction in per capita premium to the customer, by reduction in expenses, which in turn would drive volumes 3) The higher volumes would ensure higher income for distributors, notwithstanding possible reductions per capita. So, a holistic approach is needed and all distribution channels have to pull their weight. Citing rising distribution costs as the sole reason for penetration deficiency and offering a quixotic solution is like tilting at windmills which are not there.