npavan78
10-09-2008, 09:40 AM
Insurance companies are bringing down charges and cutting agency commissions in a bid to improve overall returns and remain competitive. While front-end charges of 40% could be lived with in a market that rose 40%, companies are being forced to bring down charges in a stagnant market. There is also pressure from the regulator to bring down hidden costs, following constant criticism from the mutual fund industry.
So far, two companies have made a conscious move to bring down the intermediation cost. Bajaj Allianz has drastically cut commissions by reducing nearly 50% to 11.7%. Newcomer IDBI Fortis, which launched after the market crash in January, has started out with low-charge low-commission products that mimic bonds.
Meanwhile, IDBI Fortis has introduced a commission structure that is roughly twice the allocation charge, which is a maximum of 4%. IDBI Fortis has also introduced a scheme with a guaranteed return of 8.5% — the highest in the market. The company claims that its structuring of products has worked and that its achievement of its first Rs 100 crore milestone has been the fastest.
According to IDBI Fortis MD & CEO GV Nageswara Rao, the charges are now the lowest in the industry and are more competitive than mutual funds. Until now, the argument of most financial advisors has been that an equity mutual fund plan combined with a term insurance cover would provide a better deal than a ULIP, where the higher front-end charges make the product uncompetitive for the first four to five years.
According to IDBI Fortis head of marketing and product management Amish Tripathi, these arguments were being made because of the high-commission and high-charge structure created by the life industry. “What we are trying to do is to follow the ‘Nirma model’ by bringing down the overall cost structure in the industry,” said Mr Tripathi.
Although payments to agents are performance linked, they are major contributors to the high-cost structure of life insurance companies. Companies spend several thousands in acquiring and training agents and not all pass the qualifying examination. Even among those who qualify, many drop out when they get a full-time job. As a result, the cost of putting an average agent on the street works out to well over Rs 20,000.
While the lower commission may be bad news for agents, it is good news for customers since most of the money that they pay in the first year will now go into their own account. According to Mr Rao, lower commissions will benefit agents as well as the product becomes very attractive for the buyer. However, the trend has not caught on across companies. Some companies are making a case for higher first-year commissions on grounds that this would draw more career agents into the business, thereby increase agent persistency. According to sources, IRDA, under new chairmanship of J Hari Narayan, is also keen on bringing down the cost structure and improving transparency on charges
So far, two companies have made a conscious move to bring down the intermediation cost. Bajaj Allianz has drastically cut commissions by reducing nearly 50% to 11.7%. Newcomer IDBI Fortis, which launched after the market crash in January, has started out with low-charge low-commission products that mimic bonds.
Meanwhile, IDBI Fortis has introduced a commission structure that is roughly twice the allocation charge, which is a maximum of 4%. IDBI Fortis has also introduced a scheme with a guaranteed return of 8.5% — the highest in the market. The company claims that its structuring of products has worked and that its achievement of its first Rs 100 crore milestone has been the fastest.
According to IDBI Fortis MD & CEO GV Nageswara Rao, the charges are now the lowest in the industry and are more competitive than mutual funds. Until now, the argument of most financial advisors has been that an equity mutual fund plan combined with a term insurance cover would provide a better deal than a ULIP, where the higher front-end charges make the product uncompetitive for the first four to five years.
According to IDBI Fortis head of marketing and product management Amish Tripathi, these arguments were being made because of the high-commission and high-charge structure created by the life industry. “What we are trying to do is to follow the ‘Nirma model’ by bringing down the overall cost structure in the industry,” said Mr Tripathi.
Although payments to agents are performance linked, they are major contributors to the high-cost structure of life insurance companies. Companies spend several thousands in acquiring and training agents and not all pass the qualifying examination. Even among those who qualify, many drop out when they get a full-time job. As a result, the cost of putting an average agent on the street works out to well over Rs 20,000.
While the lower commission may be bad news for agents, it is good news for customers since most of the money that they pay in the first year will now go into their own account. According to Mr Rao, lower commissions will benefit agents as well as the product becomes very attractive for the buyer. However, the trend has not caught on across companies. Some companies are making a case for higher first-year commissions on grounds that this would draw more career agents into the business, thereby increase agent persistency. According to sources, IRDA, under new chairmanship of J Hari Narayan, is also keen on bringing down the cost structure and improving transparency on charges