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    Now, know how your insurance agent is being paid for policy sold to you


    When a policy is sold to you, an insurance agent earns a commission. Also, there are promised rewards that are paid over the commissions for the sales targets achieved by them. The new rule by Irdai could work in the interest of policyholders.

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    Uniform disclosures could work in interest of policyholders.
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    High commissions, rewards and opaque structures have meant traditional insurance-cuminvestments have often been missold by intermediaries. The promised rewards are an incentive to sell products that earn high commissions and don’t necessarily fit the policyholders’ needs. “These rewards are paid over and above commissions for targets achieved. These could be in the form of sponsored holidays, household appliances or even apparel,” explains financial planner Pankaj Mathpal, Founder, Optima Money Managers.

    So far, life insurers showed commissions and such rewards separately. That is set to change. “These rewards were usually disclosed as part of overall operating expenses. Now, they will have to be disclosed under the commissions schedule. The purpose is to bring about uniformity in disclosures,” says Ramandeep Singh Sahani, CFO, Allianz Life.

    The new rulebook
    Now, the Insurance Regulatory and Development Authority of India (Irdai) has directed insurers to show such rewards and remuneration paid to agents, brokers or other intermediaries under the head ‘Commission’ in their financial statements. The objective is to ensure consistency, uniformity and fair presentation. “Rewards and/or remuneration to agents, brokers or other intermediaries shall be shown as part of head ‘Commission’ in the financial statements.

    Towards more transparency

    Rewards shall be shown as a separate line item in Schedule 2 ‘Commission’, below Net Commission in the financial statements,” the insurance regulator decreed recently. Irdai allows insurers to pay rewards of up to 20% of first year commissions to distributors whose revenue from non-insurance intermediary businesses does not exceed 50% of their total revenue in a year. The idea is to reward agents who primarily rely on their agency business for their livelihood, and not institutional distributors like banks.

    While insurers have always been required to disclose rewards, the new rule will make it easier for policyholders to understand the payout structure. “A lay person might not understand the nitty-gritties of financial statements and disclosures. Now, total payouts, including commissions and rewards, made to intermediaries can be seen under a single schedule,” says Anil kumar Singh, Actuarial Officer, Sunlife Insurance. It will be simpler now to compute the percentage of payouts.

    Do remember, however, that Irdai’s move will not impact your returns in any way. “These are related to disclosures and will not impact the product’s internal rate of return for policyholders,” says Sahani.

    This is similar to Sebi’s rules for disclosure of remuneration paid by asset management companies to their mutual fund distributors. The market regulator’s definition of commission encompasses direct monetary payments as well as payments made in the form of gifts/rewards, trips and event sponsorships. “Rewards to insurance intermediaries are covered by Irdai Compensation to intermediaries regulations (2018). Nature and quantum of such rewards are closely related to commissions and hence disclosing the same under the head Commission is more natural,” says Mandeep Mehta, EVP and Deputy CFO, Max Life Insurance.

    The transparency in disclosure will help policyholders evaluate an agent’s recommendation in the context of incentives the latter is entitled to. “It is important for the policyholder to know the total amount the agent is likely to earn by selling the policy in a single section,” says Mathpal. However, he points out that clarity on the quantum of rewards could tempt some policyholders into demanding ‘pass-back’, a malpractice that entails the agent passing on a part of his commission to the former. “Policyholders, on their part, should refrain from asking for the rebate and focus on ascertaining whether the product suits their needs or not,” he adds.

    EoM disclosures
    Irdai has also sought to bring about uniformity in disclosures of expenses of management (EoM) incurred by insurers.

    EoM represents the total expenses incurred by insurers including administration, operating and commission-related expenses, among other things. “Some insurers are presenting the operating expenses in the Revenue Account (policyholder’s account), net of the excess EoM beyond allowable limits. This does not present the exact expense overrun position of the insurers,” Irdai stated, while laying out rules for presentation of these expenses.

    Put simply, some insurers charge expenses that are beyond the permissible limits to the shareholder’s account. Now, they will have to first charge the same to the policyholder’s account. “The equivalent amount is to be then transferred from the shareholder’s account to policyholder’s account,” says Singh. This must have been a demand from investors and analysts to understand the total expenses companies were incurring towards sales and administration, say industry watchers.

    While it is largely a step to standardise accounting practices and does not affect returns, greater transparency is in the interest of policyholders and investors. “The circular is a welcome step towards standardising reporting of expenses by insurers. This is an enhancement of disclosures which will not impact financial results of insurers. Improved disclosure will let a policyholder know how much of the deficit towards EOM has been funded through shareholder account,” says Mehta.
    (Click here to know how to save on taxes for the financial year 2020-21.)

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