IRDA must cut the Gordian knot

THE INSURANCE Regulatory and Development Act was passed towards the end of 1999 and entry by private insurance companies to operate side by side with the government-controlled Life Insurance Corporation of India and General Insurance Corporation of India was permitted. It was enthusiastically welcomed by one and all. It was felt that within five years, the insurance companies would reach every nook and corner of this vast country and take the benefits to the common man. It was predicted that their premium income would increase by at least 400 per cent in five years.

The Insurance Regulatory and Development Authority (IRDA), created by the Act, has been vested with powers to control and regulate all the activities of various insurance companies and ensure that business is done on healthy lines. It was expected that a level-playing field would be provided for all the companies, public and private. In the year 2000, a few private insurance companies, both life and general, received the licences to operate.

But the expectations and objectives are facing hindrances which the IRDA must remove through firm and quick action.

The IRDA has always held that the message of insurance should be spread far and wide and the benefits should reach various hitherto unapproached consumers. For this purpose, it was announced that the market would be progressively enlarged and effectively serviced by educated and well-trained brokers and agents.

There is a story behind this desire in so far as non-life business is concerned. When the industry was nationalised in the early Seventies, it was decided that no commission would be paid to any agent on businesses pertaining to companies having a paid- up capital of Rs. 10 lakhs and more. Also, no commission would be paid to agents in respect of insurances in which banks or hire purchase financiers were interested.

This decision was taken at that time because it was felt that a lot of money was being siphoned off from the industry through payment of commission to benami agents. As a result of these decisions, over the last 30 years, no commission has been paid by the four government-owned insurance companies to agents on more than 95 per cent of their total direct business. Also, in terms of the current Insurance Act, there is no provision for a broker to operate in the market.

Therefore, when the IRDA Act entered the statute book, there was practically no intermediary service available in the general insurance industry. In so far as life business is concerned, there is no problem. The monolithic LIC has been functioning through a vast network of agents for whom a satisfactory provision has been made for the payment of commission on business secured. The LIC had realised right from day one that their business could be secured, enlarged and serviced only through a countrywide network of agents.

The IRDA has been grappling with this problem in general insurance for over a year now. Draft regulations were notified in mid-2000 for licensing of brokers. However, for various reasons, one of which is that the Insurance Act has to be amended to permit brokers, there has been no progress in this area.

In regard to the agency structure, there is a difficult situation. The IRDA has finalised licensing procedures for inducting a large number of eager and interested young men and women into the agency cadre. Strict rules have been framed for giving intensive training to such aspirants in IRDA-approved training institutions. While all these are welcome steps, a pertinent question that arises is: where does the agent go, as of today, after getting his/her licence?

Major hurdles

The four government-owned general insurance companies, which had a total portfolio of about Rs. 10,000 crores in 2000, are facing major hurdles. Their expenses of management are in excess of 25 per cent of their premium income. The safety regulations of the Insurance Act have not been complied with for quite some time now, thanks to the industry being under the control of the Finance Ministry, the GIC and the office of the Controller of Insurance, all government-owned.

These companies cannot afford to pay any commission to agents/brokers in addition to the commission they are now paying to corporate clients as ``discount in lieu of agency commission".

What about the private insurers? They have their own difficulties. They cannot develop their business without making use of intermediaries. India is a vast country and a large workforce is needed to reach prospective clients. The four government-owned insurance companies have an advantage here, in that each has over 1,000 offices all over India and employs over 20,000 persons. As against this, the private insurance companies have less than 10 offices each and the total manpower of each company, as of today, is a little over 100. The reasons for the small manpower are uncertainty regarding future business; need to avoid huge overheads and infrastructure; and need to operate at minimum possible cost. Till such time their business reaches reasonable proportions, they have no alternative other than outsourcing their requirements through agents/brokers.

The IRDA has stated time and again that the objective is to provide a level-playing field for the existing insurance companies and the new entrants. But this will not be possible unless a solution is found to the problem of creating an effective and large intermediary sales force for the new companies by way of agents/brokers.

But how does one employ agents if one's income prospects are bleak? Towards the end of April this year, a decision was taken by the Executive Committee of the General Insurance Council, after reviewing the pros and cons of commission and the special discount, as under:

(i) All tariff products - 5 per cent commission or special discount in lieu thereof is payable; (ii) individual household package policies (excluding motor) - up to 15 per cent or special discount in lieu thereof can be paid; and (iii) non-tariff products - up to 15 per cent or special discount in lieu thereof at the discretion of the insurer, may be paid.

A further circular has been issued stating that where a tariff peril like fire is an in-built cover, the whole package can give only a 5 per cent special discount/commission.

In the light of the above decision, there is no longer a ban on payment of commission to agents in respect of any business. But the companies continue to allow a ``discount in lieu of agency commission" to corporate clients. This decision effectively bars any reasonable commission going to agents. No client will agree to any commission being paid to an agent if it can be given to the client directly as a discount.

Unless the problem created by the grant of special discounts to corporate units is solved, there is no way for an agent to earn a reasonable commission in the limited areas allowed to him. An individual agent should consider himself lucky if he earns even Rs. 5,000 a month as commission on policies where he can earn a commission.

Concept of agent must change

These problems are not easy of solution unless we cross over to the Western system. There, an agent or a broker is not a mere identifier of an insurance prospect. He renders a lot of service to the client in taking the right type of cover from the right company, paying the optimum premium, collecting the policy document and checking its correctness. Later, if and when a claim arises, he assists in its processing. Such a service must begin to be given in India also.

The IRDA should strive to create an intermediary sector which will be well-educated, well-trained and well-experienced in taking care of all the problems of a client in return for a commission. This remuneration should be comparable to the commission which advertisement agencies earn. For them, the commission is paid by the print or electronic media concerned but it is for a real service rendered by the advertisement agency to its client.

In view of the various problems detailed above, there has been no visible expansion in insurance business even with the entry of private operators in the non-life sector. All that has happened is that the private insurers are making a small dent into the existing portfolio of government companies. Even this is by way of co-insurance shares being allotted to the private companies.

We can achieve the objects and reasons of the Insurance Regulatory and Development Act of 1999 only when the IRDA cuts the Gordian knot.

N. Ramachandran

The author is an insurance consultant.

He can be contacted at: mailto:nramac@md3.vsnl.net.in

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