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ShareMumbai: In the high-stakes battle between the insurance industry and the D Swarup Committee, the finance ministry as the arbiter may be veering towards the former.
The final report of the committee was submitted to the government last week.
Sources said North Block seems worried about the timing of implementing the recommendations considering the knowledge levels among investors about financial products in the country.
A source familiar with the development said the panel headed by D Swarup, the chairman of the Pension Funds Regulatory & Development Authority (PFRDA), has recommended that commissions paid to insurance advisors be phased out by 2011, except for those applicable on the traditional term-life policies, which are pure insurance policies without investments built in.
The Swarup Committee suggests that premium paid to agents be immediately cut to no more than 15%. This (upfront commission) should fall to 7% in 2010 and become nil by April 2011.
However, after receiving the final report, the finance ministry is said to be favouring the existing commission model instead of the advisory model as suggested by the panel, where commissions are paid directly by investors to distributors rather than clubbing them with the premiums.
The Insurance Regulatory Development Authority (Irda) had also made strong representations to this cause.
Irda chairman J Hari Narayan told DNA on Friday the Swarup Committee's recommendations "are not well-founded".
"We have expressed our concerns in terms of inaccuracies in the recommendations," he said.
To reiterate that commissions are the best way, a national-level rally of insurance agents is scheduled for December 2, 2009, organised by the Life Insurance Agents Federation of India.
A senior official from the insurance industry, not wanting to be named, said lack of a commission system is already affecting sales.
"The sales figures of mutual funds after scrapping of entry loads and those of the New Pension Scheme (NPS) clearly indicate the repercussions that the PFRDA Committee recommendations, if implemented, could have," he said.
The NPS has been able to attract a puny 2,352 subcribers between May 1, 2009, and October 23, 2009, through 798 points of purchase across the country.
Sebi said commissions were to be paid by investors directly to distributors.
Samir Bali, partner - financial services at Ernst & Young, feels the market is also not ready for the new regime.
"The UK market (where such a move is being planned now) is at a different stage and penetration level. Insurance penetration levels in India are abysmally low," Bali said.
"The NPS has not gained market as intermediaries are not incentivised. If we replicate the same in insurance products, from the industry perspective, it is not right," he said.
Another reason the finance ministry may not give a nod to the advisory-fee based distribution model is the number of people associated with the industry.
The PFRDA Committee report states that there are 2.7 million insurance agents in the country. Of these, Life Insurance Corporation alone uses an agency work force of 14 lakh, which it plans to increase to 25 lakh.
"If you move them to a channel where a lot of them are not able to earn enough, ensuring employment for these agents is going to be a huge task," said Bali.
Hari Narayan said there is a misconception that agents get huge commissions.
"The commission as a percentage of gross written premium varies in the range of 7-10% and on the basis of first-year premium, it is between 12% and 15%. There are a few products where the maximum commission can be 40%, but there are several products where the maximum commission is 2%. The median earnings of an agent are Rs 8,000-10,000 a month," Harinarayan said.
PFRDA said roughly Rs 15,000 crore was paid as commission to 27 lakh insurance agents in 2007-08. That's about Rs 55,000 a year or less than Rs 5,000 per month.
However, a big chunk of the 27 lakh agents are active.
(With inputs from K V Ramana)
