Agents struck by commission-refund policy

Private life insurers take step to improve persistency ratio and arrest policy lapses

An agent of a Mumbai-based private life insurance company was jolted when his employer asked him to refund a part of the commission he earned by selling life insurance policies.

He learnt later that one of his customers was not paying premium and according to his employment contract, he is liable to refund the insurance company a part of the commission he received against this policy.

“I was at a loss and did not know what to do. They have asked me to return the money I received as commission against this policy,” the agent said, admitting that he did not read his service contract carefully when he joined the insurer.

Private life insurers say they have started this practice to improve the persistency ratio of their agents and arrest lapses in insurance policies. Technically, insurers call it the “clawback clause”, which allows them to recover a part or all of the commission paid to agents if the policy is cancelled within a given period.

In other words, it means if a policyholder fails to pay the premium or surrenders the policy after one or two years, the agent who sold the policy will have to return the money he earned as commission to the insurer as penalty. This move assumes significance as nearly 85 per cent of the premium income of the life insurance industry comes through the agency channel. Insurers supported this practice, as they feel it will discourage mis-selling of policies.

“It’s a usual practice in developed economies like the UK and the US. In India, the clawback clause has started gaining popularity after the regulator came up with the persistency guidelines,” said a top official at a private sector life insurance company. He did not want to be named, due to the sensitivity of the issue.

The persistency guidelines, introduced earlier this year, recommend that an agent needs to have a minimum persistency of 50 per cent by 2013-14 and 75 per cent by 2014-15 to keep his licence.

In other words, life insurance agents will have to ensure that half the policies they sell till March 2014 do not lapse and improve it further to 75 per cent by the end of March 2015.

While globally the persistency level is above 90 per cent, in India it averages around 73 per cent in the first year. It drops further to 43 per cent by the third year, insurers said. The country’s largest insurer, Life Insurance Corp of India (LIC), however, has not introduced the clawback clause in their agents’ contracts. “Our strength lies in our agents. We do not follow such a practice,” a senior executive of LIC said.

The move is a double whammy for agents of private life insurers, as many have lost their jobs in the past one year due to declining sales in the current uncertain environment. According to industry estimates, about 500,000 agents have left the industry in the last 12 months. The total number of agents in the insurance industry is around three million, according to data with the Insurance Regulatory and Development Authority.

The insurance regulator has also capped the charges and commissions on unit-linked products, which narrowed the agents’ income from sale of these.

The slow growth in the domestic economy has also led to a sharp decline in sale of new policies. Policy issuance in the life insurance industry fell eight per cent in 2011-12. For private players, the impact was more severe, with policy issuances declining 24 per cent during the year. As a result, insurers are looking to tighten their belt and avoid premature surrender of policies.

“We have been asked to convince our clients not to surrender their policies prematurely,” said an agent with another private life insurance company.