The Insurance Regulatory and Development Authority (IRDA) seems to be trying to micro-manage the sector with its proposed measures on hiking the policy persistency (policy continuity/renewal) ratio, say life insurance industry experts.
In an exposure draft on persistency of life insurance policies, the IRDA has suggested a target of 20 policies per year for individual agents and a minimum first year premium income of Rs 150,000.
IRDA has also proposed non-renewal of an agent's licence where the persistency ratio is less than 50 percent. Further, there shall be a disincentive for a lapse, in the form of commission clawback by the insurer on a proportionate basis.
Alternatively, a part of the first year commission shall be withheld and be paid based on persistency in later years, the draft suggests.
The regulator has called for comments from the Life Insurance Council, General Insurance Council, consumer organisations and the general public by July 31, 2010, while excluding the nearly three million agents.
"Ulips accounting for nearly 85 percent of the industry's sales are sold by companies/agents as a short-term investment product that can be encashed after the lock-in period. The blame for this and other ills of plaguing the sector entirely rests with the IRDA," R. Ramakrishnan, a member of the Malhotra Committee on insurance reforms, told IANS.
"Even in the US and UK, only 10 percent of the life insurance policies are held to maturity. IRDA should not make the agents a scapegoat for its and life insurers' failures," he added.
Ramakrishnan and other industry experts said if the IRDA wants to focus on policy persistency than it should fix the minimum persistency ratio for the life insurers and not for the agents.
Saying that data collected by IRDA should be interpreted properly, Ramakrishnan said the LIC's high persistency in Ulip is mainly due the fact that it sells single premium policies with two percent commission, whereas the private sector products are annual premium and the agency commission is 20 percent.
Officials of private life insurers said that procuring 20 policies by an agent is a tall task as the average productivity of an agent is 0.3 policies per month and an active agent may get one policy per month.
By prescribing productivity targets, IRDA is trying to "micro-manage" the sector, is the unanimous views of a cross-section of industry officials that IANS spoke to. Agent targets are the prerogative of insurers, they said.
They said a large chunk of individual agency force will go out of the system and companies have to incur additional expenditure in recruiting new agents-- around Rs.5,000 per agent.
IRDA data show that as on March 31, 2010, the total number of life insurance agents stood at around 2.9 million (private sector 1.58 million, LIC 1.4 million). Between Jan 2010 and March 2010, around 200,000 agents were added and around 240,000 agents deleted.
The number shows the indiscriminate manner the companies have been hiring agents and IRDA licensing them.
"As per IRDA's figure, there is one life insurance agent for every 333 Indians. However, if one takes out the below the poverty line population then the ratio of agents to population is very high. But weeding out the non-performers is the duty of the insurers," Ramakrishnan said.
"It is time IRDA Chairman grill company CEOs and CFOs on the issues like expense overrun, low persistency, high agency and sales force churn and other core issues. If that happens things will fall in line," a senior official of a Mumbai-based private life insurer told IANS, preferring anonymity.
Welcoming the IRDA's move on clawing back of the commissions paid on lapsed policies, an industry official said: "The clawing back should be applicable to all intermediaries and not restricted to individual agents."
Interestingly, the 61-month persistency ratio of individual agency channel for private life insurers for the three-year period 2004-05 to 2006-07 is around 50 percent, much higher than that of corporate agents (just below 45 percent), brokers (less than 40 percent). The persistency of bancassurance channel (policies sold by banks) is above 50 percent.
"Any measure to improve the persistency is welcome. However, it should not be a knee-jerk reaction. Perhaps a calibrated approach is what is wanted," Secretary General of Life Insurance Council SB Mathur told IANS.