Distributors to see reduction in commissions from today

The New Year may bring challenges for distributors of financial products who had found solace in unit-linked insurance products (Ulips) after the Securities and Exchange Board of India (Sebi) had banned entry load on mutual fund instruments from August this year.

From January 1, the Insurance Regulatory and Development Authority (Irda) guidelines capping overall charges on Ulips will come into force.

Irda had capped the difference between the gross yield and the net yield at 3 per cent for 10 years and at 2.25 per cent for more than 10 years. Within the overall cap, fund management charges were capped at 1.35 per cent for all tenures.

“We expect the commission to fall from 20-40 per cent to 9-20 per cent. A bulk of the products we sell give us 20 per cent commission. Looking at the new charge structure after the products are re-launched, we may shift to more traditional products. Big distributers may not be affected as much as individual agents,” said National Head of Distribution for Geogit BNP Paribas Financial Services K Venkitesh.

Most distributers and mutual fund agents had shifted to Ulips, from selling mutual funds, after Sebi had capped commissions on mutual funds.

After entry load ban, the commission for distributers had shrunk significantly from 2.25 per cent earlier by 50 basis points to 1 per cent now.

But distributers might shift from Ulips to either traditional products by insurance companies or mutual funds products.

“With lower commissions and consumers recognising the issues like high fees, mixed exposure to equities and insurance, misaligned incentives, distributors will have to shift back towards selling mutual funds,” said Radhika Gupta, co-founder Forefront Capital Management.

“There will be slight rationalisation in the commissions being paid by the insurance companies on Ulips now. Most of the companies have re-filed their products and we expect to see the changes in the charging structure in the first week,” said Bajaj Capital CEO and Director Anil Chopra.

“In order to reduce the charges, insurers can reduce either commissions paid to the agents or the management expenses. In our case the reduction in commission will not be much,” said Bajaj Allianz Life Insurance CEO and Allianz Country Manager Kamesh Goyal.

“Wherever commissions were high we have reduced it by 5-10 per cent,” said Future Generali chief actuary G N Agarwal.

Since the commissions are embedded in the product, policyholders might not directly benefit from lower commissions paid to agents.

“To generate new business annualised premium (NBAP) margin of 13-15 per cent for a regular premium low-charge policy, insurers will have to bring first year commission rates below 10 per cent and cut renewal commission rates by 1.5-3 percent,” Edelweiss said in a report.

In addition insurers could also reduce policy administration charges and premium allocation charges to manage a difference of 3 per cent between the net yield and gross yield.

Both the term of Ulips and the minimum ticket size had increased in the new products launched by the insurers. Insurers had also raised surrender charges significantly to ensure high persistency.