These modifications follow the Insurance Regulatory and Development Authority of India’s (Irdai) master circular on life insurance products (Insurance Products Regulations, 2024). Key changes include reducing the entry age to buy an endowment plan to 50 years from 55. The minimum basic sum assured has been increased to ₹2 lakh from ₹1 lakh with an increase in premium rates. Interestingly, the policy will now acquire surrender value at the end of the first year, provided a full one-year premium has been paid. Earlier, it was two years.
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What agents say
The revised agent commissions are a corollary to the modifications in endowment plans. The decision hasn’t gone down well with agents. The All India Life Insurance Agents’ Federation of India (All India LIAFI) and regional federations plan to start a nationwide protest. They have conducted peaceful demonstrations outside LIC branches.
“The agent commission has remained the same since the launch of the LIC in 1956 to September 2024, while salaries of LIC employees and executives have only been rising. LIC had reduced the commission by nearly 7%, including the bonus payment. We demand that first-year commission remains as is, which is nearly 35% (including bonus),” said Nayan Kumar Kamal, national president of All India LIAFI.
Agents also demand that the second-year commission be increased to 9%. To be sure, life insurers can pay up to 7.5% renewal commission. Ranvir Sharma, national president, Life Insurance Agents Federation of India -1964, a sub-federation of All India LIAFI, said LIC only pays 5%.
“Our 9% demand is justified because LIC offers a 10% discount on policies sold by the LIC staff and 15% in direct selling. When LIC can bear this much discount, our renewal commission could at least be 9%,” he said.
The Federation said the clawback clause is even more worrisome. “What is our fault if surrenders happen? We should not be held accountable if a policyholder faces financial difficulties and does not pay premiums,” said Kamal.
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They also said the reduction in the entry age to buy policies to 50 years should be reconsidered. “People closer to retirement would want to buy policies to leave a legacy for their family. When life expectancy is increasing, the move to reduce the age bar is regressive,” Sharma said.
They also demanded a lowering of GST on late premium payment fees. “When you charge GST on the premium, why do you add it to the late fee, too? It makes our job difficult when we convince policyholders to keep running the policy,” Sharma added.
Questions sent to LIC remained unanswered till the time of filing the story.
What industry experts say
Krish Prabhakar, an insurance industry veteran and general manager at Kuwait-based Zain Insurtech, said given the direct correlation between surrender value improvement and acquisition cost (agent’s commission), the reduction of commission is a no-brainer and agents should rather focus on increasing volumes.
“The agents need to focus on increasing volume of policies sold with improved persistency. Positive surrender value from the end of the first year is not the norm, and therefore LIC has a rationale for adjusting commission structures. I presume agents earn more than 70% of first-year premium in first three years on participating policies with renewal commissions trailing for service,” he said.
So far as clawback is concerned, this clause exists in developed markets such as Europe and Singapore, and even in less-developed markets such as Malaysia and Taiwan, according to Ketan Mehta, founder, ACESO, a company that provides solutions to policyholders. “The persistency ratio is high in these countries,” he said.
Persistency-linked bonuses can compensate for clawback of commission. “In my view full surrenders happen to a large degree due to mismatch of the client’s need to his/her affordability which is part of the due diligence agents are expected to perform prior to closing a sale,” Prabhakar said. “If clients are not stretched to the maximum with no cushion available for an emergency, full surrenders can be minimized or eliminated. It is a reflection on quality of sale by the agent and therefore mis-selling has consequences. On balance, commission clawbacks can be compensated with persistency bonuses.”
Persistency ratio tells you how many policies have been renewed in a given timeframe. It is 77% in a timeframe of 13 months and over 50% for 60 months, LIC data shows. It means over 20% of policies are discontinued in the first year itself, and half of the policies do not cross five years.
Lack of training
Agents may have to accept the new commission structure, as LIC has issued a notice saying it will take disciplinary action against agents who “hamper the smooth functioning of its offices and affect rendering proper servicing to its policyholders”.
Curtailing commission and associating it with persistency will help, but equally important is putting more time and effort into educating agents. “The quality and education level of a few agents are questionable. Even a 10th pass can appear for a nominal exam to become an LIC agent. Earlier, LIC would conduct a 100-hour training which was first reduced to 50 hours and now it is just 25 hours. Gross mis-selling by agents from bancassurance channels is rampant too,” Mehta said.
Sharma agreed. “Mis-selling happens because young boys are enticed to make easy money. They do not understand the product and sell it to people. Why should we, who have given their entire life to LIC, suffer?” said Sharma.
It will be interesting to see if the new commission structure will help improve persistency. The solution perhaps lies in having a secondary market where policyholders can sell their policies to interested buyers.
“It is a win-win situation for policyholders, agents and insurance companies. While a full-fledged secondary market is not there in India unlike some developed markets, a one-time assignment is possible. ALIP (assign life insurance policy) can resolve agents’ concerns about reduced payment. It can also ensure part of death benefit goes to the beneficiary even after surrender. At the same time, insurance companies can protect their AUM by not having to shell out surrender payout,” said Mehta.
Also Read: Why selling your insurance policy is better than surrendering