HOW ABOUT MAKING COMMISSIONS OFFICIAL?

The best way to bring down distribution charges in insurance is to increase price competition among agents by legalising rebates. Dismantling the agency structure could have unintended consequences, says Mayur Shetty   THE global financial crisis has left Indian banks largely unaffected. With the central bank releasing Rs 4.2 lakh crore of liquidity support, banks are awash with funds. The ratios for bad loans are better than their average for this decade. The assets of other players in the financial sector have also not been impacted. But what appears to be changing is the war on charges by regulators across the board.      Banks have been asked to waive charges on the use of ATMs. Mutual funds have been told to remove load from August 2009. Life insurance companies have been subjected to a cap whereby the difference between gross yield (the return had there been no charges) and the net yield (return net of charges) is no more than 300 basis points over 20 years. These are all positive developments for consumers. The reduction in charges is expected to improve the return.      But that appears to be only the beginning. A consultation paper titled 'Minimum Common Standards for Financial Advisers and Financial Education' has said that all financial products should go 'no load' with effect from 2011. The consultation paper is the work of a panel constituted by government. It is headed by D Swarup, chairman of Pension Fund Regulatory and Development Authority, and has members from the ministry of finance, ministry of corporate affairs, RBI, IRDA and Sebi. Other suggestions include a system for improving financial literacy and creating a self-regulatory organisation for financial intermediaries who will work for fees from the customer.      The insurance industry has reacted by saying that the views of the major constituents has not been taken into consideration. The industry says that the view of life insurers was not taken into account, neither do the views of insurance regulators find any place in the parts of the report that was made public. The existence of insurance agents' association was not also acknowledged. An investor meet to discuss the report and the industry's response will be held on Wednesday and a clearer reaction of the industry may emerge from the meeting.      Selling insurance products without any commission is not a unique concept. Many of the grandiose schemes announced in the earlier budgets were aimed at covering large sections of the population under schemes administered by state-owned insurance companies. But the schemes were targeted at those at the bottom of the pyramid who had no knowledge of financial services and, therefore, few sought to get enrolled. Some companies have been selling car insurance online where rates are much cheaper than those available with auto dealers, but sales remain modest.      "Buying a third-party insurance cover for a vehicle is a legal requirement. But agents do not want to sell standalone third-party cover, as there is no earning for them. Despite the legal requirement for the cover, the number of motor policies are half the number of registered vehicles," says Kamesh Goyal, CEO, Bajaj Allianz Life Insurance. He adds that insurance penetration of householder policies is low because commissions in these products are very low.      Clearly, what is required is not a demolition of the distribution structure but more competition among the distribution channels. In the developed markets, term insurance cover in life and auto insurance in non-life is available at very cheap rates, thanks to the presence of online aggregators. These online aggregators are websites which get quotes from various companies and allow the customer to choose the most competitive one. The aggregators work for a commission from the insurance companies. In the absence of aggregators, it will be almost impossible to compare quotes across a dozen companies.      Similarly, the one thing that everyone acknowledges in private, but feigns ignorance about in public is the rebating of commission. In many financial services this happens openly. But in the case of insurance, rebating is always in cash because rebating of commission is illegal. This is not the case in developed markets like the UK where the agent can use part of his commission to buy additional benefits for the policyholders. Companies such as Aviva had earlier made a case for legalising rebating of commissions in India. Legalising rebates benefits all. The company gets higher premium, the policyholder gets better returns and the agent can claim the rebate as an expense like in the West.      If the life industry has turned a blind eye to the high acquisition costs, it is largely because topline growth has been its only yardstick of success. In a way, the regulator has also kept the spotlight only on the topline by reporting only premia from sales of new policies without focusing on assets under management or persistency ratios. In the absence of other parameters, the topline numbers have been used by agents to assign fancy valuations to life insurance companies.      One of the positive aspects of the Indian economy is the balance between savings and investment. To a large extent, savings of the salaried have been driven by tax breaks on instruments such as life insurance, provident funds and small savings schemes. The new tax code proposes to reduce the tax breaks and bring down the rate of income tax. If this is the direction of future policy, then there will be very little incentive to save. And if there are no distributors, there will be nobody going out to sell retirement savings products. Globally, there is a debate on whether financial services should be treated as utilities, which should be allowed to function within a narrow operating spread. But in India banks and telephony companies have shown that it is possible to build a pan-Indian distribution network and sell low-margin products.      mayur.shetty@timesgroup.com