Why not back load the Commissions?

Dear Mr Hari Narayanan,

Thank you for the slew of changes your organisation has brought about in the recent past, mostly pertaining to Ulips. These changes have made the products customer-friendly and significantly reduced the charges they had to bear earlier. There is lesser incentive for an agent to ‘churn’ given that the charges are more uniformly recovered and his/ her commission also will not be a bumper figure in the first year and taper off in the remaining years. I’m sure there is more to come from your side on Ulips, and we eagerly wait to know what that is.
There are a few things I want to draw your attention to — I’m sure you are working on this too, but we are not aware of it as yet.
l . What about traditional products? Ulips are transparent — charges are visible — and there has been a clamour for reduction of charges in the interest of the customer. This has been addressed to a great extent by the changes you have proposed. But, what about traditional products? Their charges are not disclosed at all. However, they are there, like salt in sea water. And they are high — how can they offer a first year commission of up to 40% in endowment and moneyback products?
Won’t tightening of Ulip norms incentivise insurance companies to look at traditional products and push those instead?
Customers are still sold policies. Most of them don’t know the details of their insurance policies. Addressing one portion of the insurance product space and leaving the other open is going to create an imbalance in future, with companies and agents interested only in selling traditional products. The charges structure in traditional products needs a relook
A reverse incentive structure — why not invert the incentive structure and pay the agents highest in the last year of the policy and the least in the first year? This is a win-win situation for every one. Insurance companies will have more money in the kitty to work with as the outflow to start with will be minimal. The customers will not start their policy with a disadvantage and are paying the agent over a period for servicing them over the term of the policy. The agent may sulk, but this is good for them too as the agency will prove to be a wealth creator, giving ever-increasing amounts as trail commission over time. This will improve persistency and curb churning like none other.
Misselling / misleading clients — getting a signature on the benefit illustration and returns on Ulip products to be shown at 6% and 10%, freelook period etc are efforts in that direction... this alone does not sort out misselling. The process has to be internalised by the insurance companies and their channels.
Banks and national distributors are the worst offenders here. The employees of banks especially have a captive audience — ironically, an audience that believes that these banks are trustworthy! My experience tells me that bank staff who double up as insurance salesmen have very poor knowledge and in view of their targets, are prone to misselling to their customers. They have nothing to lose as they do not have any real connect with the customer like an individual agent, who keeps going back to the client. They know that they will be elsewhere (in another branch, another bank!), probably with a promotion on achievement of targets — even if it is by dubious means.
A foreign bank affiliated with a prominent private insurer only used to sell Ulips that gave them 60%+ first year commission, when there was another version of the same product which gave them 20+% commissions. I have personally seen people on the verge of retirement being collared for Ulips, when what would have worked better is an investment product. I keep getting illustrations from banks that show product returns at 30%... Banks always pitch for high premiums and that compounds the problem of clients. There are three things you could consider doing — i) Ensure that these personnel have requisite knowledge — the workarounds to properly studying and giving an exam should be curbed ii) The examination should be comprehensive and stringent iii) Have a complaint mechanism in place and initiate stringent action (suspend their licence and take legal action) when malpractices are uncovered.
You have set the ball rolling. I hope my pointers and suggestions are of some use, going forward.
Sincerely,
Suresh Sadagopan