Panel for doing away with insurance commission

The expert committee examining the way financial products are sold, which is chaired by Pension Fund Regulatory and Development Authority Chairman D Swarup, will stick to its earlier proposal of banning payment of upfront commission by insurance policyholders.

The panel, constituted last year, is giving its report to the government tomorrow. It was also asked, among other things, to suggest how to stop mis-selling of products and how to help raise financial literacy among citizens.

The upfront commission decision comes despite severe opposition to the proposal from the insurance industry, which was opposed to the idea of bearing the distribution cost. The Insurance Regulatory & Development Authority and the Life Insurance Council, the industry lobby group, had both opposed the proposal after the committee released a consultation paper in early September.

The committee had said upfront commissions embedded in the premium paid be reduced to no more than 15 per cent of the latter immediately, from the current 16.25 per cent. In 2010, this should be brought down to 7 per cent and a zero-commission structure should be in place by April 2011, it had suggested.

The committee, after receiving inputs from various industry players, has decided to stick to its position and leave it for the government to decide if the recommendations should be accepted or not, sources familiar with the development told Business Standard.

The committee, which had representatives from the insurance industry, was of the opinion that an end to the existing commission structure is needed to stop mis-selling of products, as agents and financial advisors often pushed products where they could earn more.

On its part, the insurance industry felt the move would stop companies from pushing policies, as they would have to bear the cost, which would have an impact on their financials. Besides, the industry argued, there was no way to recover the expenses incurred if there was no upfront payment of commission by the policyholder. In recent months, the Securities and Exchange Board of India has barred mutual funds from charging an entry load, forcing fund houses to bear the cost of distribution, despite protests.