Insurance in India is usually sold and not bought

Insurance in India is usually sold and not bought by individuals. This is what most Insurance experts of the country say. However in the western world, with more than 100 companies operating in the same country, insurance is usually bought and not sold. This is possible only because people are fully aware of their insurance requirement and they do not have to be convinced and coaxed to purchase a particular product, unlike the situation in India! With only 25 odd companies operating in such a huge country, they are fighting for survival since the agents and the sales executives need to “convince” the customers that

1. They NEED insurance
2. Their product is the best and the most competitive in the whole market

The truth remains that neither the agents nor the customers are completely aware of their own requirements and are not fully convinced that they need insurance. As long as they believe insurance is an investment tool, they will never be able to understand the unique importance of insurance in their lives.

Insurance is a product that needs to be purchased by everyone for the protection of their family and not as an investment tool. Although some insurance products like unit linked ones do have a market exposure and return oriented approach, their primary focus still remains to be life cover.

With the surge of ULIP products in the industry, everyone from customers to agents focus on it for their own reasons. Customers want maximum return of the premium amount shelled out of their pockets and agents want highest possible commission. Hence ULIP has become their common favourite. It indeed is a good product if the same has been understood and purchased with its original value.

However, the latest guidelines of the ULIP structure by the IRDA has terribly threatened the agents of their earnings that would reduce drastically for the same amount of premium collected.

• Commission Cut Down:

According to the latest guidelines by the IRDA, there has been a maximum cap on the charges that can be collected from any ULIP product.  Since commission for agents is paid from the charges collected by the insurer from the premium amount, hence even commissions would be reduced. Now this has threatened most agents who mainly sold on ULIP products to their customers, as their earnings would reduce dramatically.

Thus they would either have to shift their focus to traditional products with higher revenue or increase their business manifold to maintain the same level of income.

Another concern some agents may have is that, most private insurers do not have too many traditional products for the agents to focus on. Thus the insurance companies will now have to increase their product basket or come up with some attractive revenue product to keep their agents involved. Else their distribution channel will wither away with time if they are not able to sustain themselves of a decent earning.

• Minimum Business Commitment:

Another challenge the agency channel might have to face is their minimum business commitment. Like most distribution, 80% of the entire business is done by 20% of the agents and the rest 20% business by the majority 80%. Thus the channel consists of many ineffective and non-committed agents who hardly do any business in the entire year.

The agents would now have to do a minimum of either 20 policies or collect Rs 1.5 lakh of premium per annum to maintain their license. If they cannot do 20 policies in a year, then they will have to compensate it with the other parameter of collecting Rs 1.5 lakh of premium. If they fail to do so, then they would be automatically de-licensed by the IRDA.

This isn’t too much of a threat to the 20% of the agents who are dedicated and work throughout the year. This is an area of concern for the remaining 80% because if they are de-licensed in a particular year, their renewal earnings from previous years’ sale would also be affected.

Hence agents will have to pull up their socks if they would want to remain in business and continue to earn.

• Persistency Level:

IRDA has become very strict as far as persistency level of the policies is concerned. According to the latest update, a minimum of 50% persistency needs to be maintained by each agent to continue their license. It means that at least 50% of the policies need to be renewed the following year and be enforced. It also means that not more than 50% of the policies can afford to be lapsed in a particular year.

This is done to control mis-selling by the agents in order to collect higher first year premiums. Since most products has highest commission on their first year premiums, innocent customers are convinced to purchase new products each year instead of renewing their previous ones.

Now, this practice of mis-selling can only be curbed if the previous policies are renewed instead of starting a fresh policy. Thus IRDA has come up with this concept of persistency. Each agent will have to renew at least 50% of their previous years’ policies to remain in business. If they fail to do so, their licenses would be terminated and all renewal commissions would be stopped.

Now, with so much activity in the industry, the most confused are the customers. They do not know whom to trust and how much to trust them. Since quite a lot of the customers are also not very insurance educated, they do not know how to independently take insurance decisions.

Thus for their benefit insurance companies will now have to come up with unique ways to retain their business.

Newer areas of focus:

• Online products are indeed a very good option as it can be completed without any agent interaction. However, customers need to be insurance educated for the same. They need to know what product is good for them and why in order for them to purchase the same online.

Although the tool is good, customers should be able to use the same effectively as well in order for the channel to become successful.

 

• In order to resolve queries of the customers, Effective Call Centres need to be established, which would be able to handle all queries over the telephone without any physical interaction requirement. Only once this can be established, online products will take off effectively.

Thus, even though the industry anticipates the agency channel to shrink with the new development of the IRDA, customers do not need to feel threatened as the IRDA has taken these decisions for the customers’ benefit.