IRDA cracks whip on agents

ERRANT insurance agents had better watch out. In a first-ofits-kind measure, Insurance Regulatory & Development Authority (IRDA) has decided to penalise agents if life insurance policies are not renewed. The move, aimed at curtailing misselling, will entail commissions being retracted from agents and credited to the policyholder’s account.

One of the main complaints against life insurance agents has been that they sell regular premium policies, commissions for which are in the range of 25-35%, by passing them off as single-premium policies, which attract 2% commission. The regulator has now asked insurance companies to claw back commission paid out in policies where premium from the second year onwards is less than the first year. In industry parlance, claw back refers to the recovery of commission already paid to agents.

Since prospective buyers are reluctant to commit large annual payments for 15-20 years, unscrupulous agents position a regular premium policy as a one-time investment scheme, similar to a mutual fund. They also inform the policyholder that she can invest more money in the scheme in the forthcoming year and that, even if she chooses not to, she could exit the policy after three years. The flip side of such sales is that the buyer usually does not pay the second-year premium. Since charges in an insurance policy are front-ended into the first-year commission, the policyholder ends up with a negative return by not paying renewal premium. IRDA, in a recent circular, said: “For the current year (FY09), where products had provided for more than 25% reduction in subsequent premium, the difference of premium should be treated as a single premium and the commission clawed back and invested in the policyholder’s account.”

This means if a policyholder pays Rs 100 as premium in the first year, against which Rs 35 is commission paid to an agent, and renewal premium of Rs 60 in the second year, the company will have to treat the second-year shortfall (100-60) as single premium in the earlier year and recover the difference. In other words, commission on Rs 40 would be recalculated at 2% instead of 35% and the difference recovered.

The circular has rattled insurance companies that are now worried that this directive could be misused by customers to leverage a rebate of commission from agents. “All that a policyholder has to do is to not renew the policy. The commission on the shortfall would than be recovered from the agent and transferred to the policyholder’s account,” an insurance official said. According to an insurance chief executive, the directive does not allow companies to deal with disputes between policyholders and agents on the merits of the case. “If a company does not claw back commission, the policyholder may go to court on the ground that the company has not been following IRDA’s directives,” the official explained.

Source : www.insuremagic.com