Cut in motor portfolio agency commission to prop insurers

The general insurance industry is set to save about Rs 300 crore in 2004-05 due to the reduction of agency commission to 10 per cent of the premium paid on motor portfolio.

Sandeep Bakshi, managing director and CEO, ICICI Lombard General Insurance Company Ltd, told Business Standard, " The acquisition cost of insurance companies will fall, due to the 5 per cent reduction in agents' commission on motor insurance. This will have a positive impact on the bottomline of insurance companies during the current financial year."

The Insurance Regulatory and Development Authority (Irda) notified a special discount on the agency commission or brokers remuneration and remuneration payable to direct insurance brokers and insurance agents on March 3, 2004.

This has shrunk the agency commission on motor portfolio from 15 per cent to 10 per cent, with effect from 1 April, 2004. The revised agency commission is valid for a period of one year.

Chennai-based Royal Sundaram Alliance Insurance Co Ltd, managing director, Antony Jacob said that they support the move by the IRDA to reduce the rate of commission for private motor from 15 per cent to 10 per cent as this will provide an additional margin in managing the combined operating ratio (includes claims, commission and management expenses) for the motor portfolio.

"On an average of a written premium of Rs 10,000, we pay Rs 1,000 per annum for the lifetime of the policy and this is an equitable arrangement to compensate for the agent's expenses of acquisition and administration. The ratio of commission to premium will be reviewed as part of the considerations being given to the abolition of the motor tariff, "he added.

Irda made it mandatory for all insurance companies to underwrite motor insurance as it is loss making portfolio. Motor insurance has been a bleeding portfolio for the public sector insurance companies.

The gross premium income earned by general insurance companies was Rs 13,879 crore for the year ending March 31, 2004. Of this, motor portfolio accounts for 40 per cent.

It is expected that both public and private sector insurance companies have about six lakh agents across the country.

An insurance broker points out that private insurance companies under the motor portfolio insure only the car segment as it lesser claims compared to commercial vehicles and therefore profitable than the latter.

"They do not underwrite commercial vehicles or underwrite only the minimum level stipulated by the regulator as the portfolio is ridden by claims and thus a loss making segment. While the practice of public sector companies have been of not paying any commission to agents underwriting commercial vehicles as it is loss making, " he added.