Insurance agents may've to come clean

21 Aug 2009, 0551 hrs IST, Gireesh Chandra Prasad & Anto Antony, ET Bureau

NEW DELHI: Insurance agents will soon have to disclose the commission they earn on various policies to clients before selling a product, if a high-level panel of financial regulators has its way.

The panel, set up to suggest ways to increase transparency in the way investment advisors function, hopes this will ensure brokers do not woo people away from customer-friendly products to those yielding more commission, one of its members said.

The panel, comprising officials from RBI, finance ministry as well as the regulators of insurance, provident funds and capital markets, will submit its proposals in September.

Insurers offer up to 40% of the first year's premium of a policyholder as commission to the agent, the panel member said, requesting anonymity.

Agents get their commissions mostly without the knowledge of policyholders.

According to Sashwat Sharma, director-insurance of consultancy firm KPMG, most insurers offer 20-60% of the first year's premium as commission on life endowment and unit-linked policies.

Many financial advisors are luring potential mutual fund customers into insurance policies to pocket high commissions, after the capital market regulator lifted the entry load on mutual funds, government officials said.
Recently, SEBI replaced the commission system in the mutual fund industry with a fee negotiated between the broker and the customer.

This may lead to mutual funds and the New Pension System (NPS) losing investments to insurance products in the short term as, except in metros, a lot of people depend on intermediaries for investment advice, Mr Sharma said. This will change in about 10 years, he added.

NPS, which was opened to all citizens on May 1, has fixed a commission of Rs 40 for initial costs and Rs 20 for subsequent transactions and, therefore, may be discouraged by brokers.

Brokers can be checked to an extent by making it mandatory to reveal their commission for each product to customers upfront, a finance ministry official said.

But experts feel that it may be difficult to monitor if brokers are playing by the rule, particularly in small towns. A better solution, they say, will be to remove or fix commission on insurance policies. "It is difficult to remove the commission on insurance products completely as it is provided in the insurance law itself," said the finance ministry official.

He, however, said the merits of mutual funds will attract customers. "If the equity market does well, investments will invariably come to mutual funds. If the market doesn't, then there will be less interest in mutual funds anyway. If mutual funds do well, there will be pressure on other segments of the market to reduce commission."