The life insurance segment is struggling with a high rate of agent attrition. Over the past three years, some 900,000 agents have quit. The most common reasons cited are lack of decent compensation, inadequate training and absence of career growth prospects beyond a certain level. With agents dropping out, insurers have turned to other channels such as bancassurance (selling insurance products through banks).
In some companies, bancassurance contributes to almost 40 per cent of the total new business premiums. The numbers of agents has reduced considerably, while the fact is that customers want to have an agent, who is not only long-lasting but also transparent in insurance services.
The Insurance Regulatory and Development Authority of India (IRDAI) issued the final guidelines in 2015 for the appointment of insurance agents. With higher penalties and more onuses on selling based on the requirements of customers, regulations have turned more stringent for agents. These guidelines are effective from April 1.
Now insurers are responsible for all acts and omission by its agents, including violation of the code of conduct specified under the guidelines. For violations, they will be liable to a penalty of up to Rs 1 crore. Insurers are more cautious while appointing agents, now because the power to appoint them is in their hands.
As penalties on insurers are very high, further checks on agents might also be made in the future. According to the new norms, an individual can act as an insurance agent for only one life insurer, one general insurer, one health insurer and one monoline insurer. The Regulator has made it clear that anyone acting as an insurance agent in contravention of the provisions of the Act will be liable to pay a penalty of up to Rs 10,000. So far, the penalties imposed on agents were negligible, adding with the new provision, commission-based product sales might virtually come to an end.
New work system:
Max Life Insurance has launched a new initiative, New Work System (NWS), aimed at improving agents’ productivity through constant training and thereby checking their attrition. The process involves daily training for agents, automated product suggestions and use of tablets for sale. This would enable agents to sell only those products that meet customers’ requirements.
Max Life has understood that agent is the primary source of information for several customers. Hence, it is crucial that agent is given adequate training on a daily basis to ensure they understand the importance of right selling. Their sales managers and officers provide training during working hours to these agents everyday, which will equip them better.
Max Life believes this new initiative will help in improving quality of selling, customers’ comprehension of products, need-based sales, etc. NWS will improve quality of sale and check mis-selling. The system will also offer automated product suggestion. This preserves the required human interface but at the same time automation removes human biases. NWS will provide an on-the-spot, “benefit illustration” for customers. It will also capture the complete sales journey and summary of the dialogue will be sent to the customer through email. The entire sales process is done through tablet-based application. This will improve the conversion efficiency of sales and, therefore, improve agent rewards.
Agents crashing out:
The life insurance sector has faced a challenge of agents leaving the profession. Data from the Life Insurance Council show companies lost 51,278 agents in 2015-16. The Insurance Regulatory and Development Authority of India, in an Exposure Draft on remuneration for insurance agents and intermediaries, has proposed higher commission for agents in the first year as also subsequent years to incentivise these distributors.
Further, it has also said that insurance companies can give rewards over and above commissions. Data shows that the public sector Life Insurance Corporation of India (LIC) saw 102,044 agents exit in 2015-16. Private life insurers, on the other hand, made an addition of 50,766 agents in 2015-16.
Things have changed quite dramatically in the past decade, especially in major cities. Beside the entry of private players, the kind of products and methods of buying have changed. An example of which is the introduction of unit-linked insurance plans, an investment-cum-insurance plan that is not recommended by most financial planners, means returns on insurance policies are no longer four-six per cent annually but are significantly more when stock markets are rising. And, can be equally risky when the markets are falling, and even wipe out the principal, as high commissions are paid to agents.
So, some serious advice is required if you are into such complex products. Due to these changes, a number of new channels have emerged. Broadly, the various distribution channels can be classified into (a) direct- through the insurance company staff or the company’s website, (b) representatives of the insurance company-agents, corporate agents like banks, or independent marketing firms (c) independent players – brokers and online aggregators.
Better incentives:
Life Insurance Corporation of India (LIC) is planning to better incentivise its agents to retain them. The state-run insurer plans to recruit close to 1 lakh agents this year. LIC had lost close to 1.5 lakh individual agents, partly because of lesser number of new products and also due to stuff business targets. LIC is planning new incentive structure to add net one lakh agents this year.
As of March 31, 2016, LIC had a total of 10.61 lakh individual agents, compared with 11.63 lakh in 2014-15, according to data from the Life Insurance Council. Currently, LIC has 22,000 development officers managing teams of individual agents and their development. Many agents had left because of stiff business targets.
An LIC agent is required to sell minimum 12 policies per year, and if he fails to achieve this, he has an option to complete the target in another one year. But in the third year, if he fails to get 36 policies, his registration gets cancelled. Apart from LIC, private players such as Bajaj Allianz Life Insurance and ICICI Prudential Life Insurance have seen drop in the number of individual agents in the last financial year compared to the previous year. On the other hand, insurers like Reliance Life Insurance, SBI Life Insurance, HDFC Life Insurance, Kotak Mahindra Old Mutual Life Insurance have seen rise in the number of agents in March 2016 as against March 2015.
Data from the Life Insurance Council shows that SBI Life had over 92,619 individual agents as on March 2016, compared with 83,656 in March 2015. If the Indian economy picks up and the life insurance industry grows at 15-18%, new individual agents will join the industry in big numbers.
IRDAI has directed that insurance companies can give rewards over and above commissions. The rewards should not be more than 20 per cent of first year commission or remuneration in case of individual insurance agents and 40 per cent of first year commission or remuneration in case of insurance intermediaries. The proposals would help incentivise agents and especially would be beneficial in the group term space to bring it on par with non-life sector.
In regular premium policies (par and non-par), for policies with premium paying term of 12 years and move will have 50 per cent first year commissions for agents and 10 per cent for the subsequent years. For those with term of 5-11 years, the commission will be 40 per cent of first year premium and 10 per cent in subsequent years. Directionally, the guidelines are the right step and allows insurance company boards to have flexible incentives based on performance and business quality. With respect to the relationship between the premium-based commission and the value created for the client, the issue is a little more complex.
Clients probably gain more peace of mind and more financial stability for transferring their large and most expensive risks. In this sense the scaling of commissions to premiums is roughly consistent with value added. The premium-based commission provides the intermediary with more compensation.
Exit outnumbers entry:
The number of insurance agents in the insurance sector has been dwindling both in private sector and in the Life Insurance Corporation of India (LIC). According to data from the Life Insurance Council, more than 270,000 agents exited the sector this financial year. Even LIC saw an exit of almost 146,830 agents which is more than number of agents added to the private life insurance sector.
Life insurance industry lost more than 30,000 agents this financial year up to November 30, 2015. According to data published by the Life Insurance Council, the 24 life insurance companies put together saw 30,828 agents exiting the industry. Now, the net number of agents in this segment is roughly 2 million. This is much lower than the attrition level reported in the previous financial year.
The regulator and the industry have taken steps to ensure that the agency workforce in the life insurance sector sees an increase. From reducing pass percentage for qualifying as an agent to letting insurance companies deciding their own rates of persistency for agency, the regulator is ensuring that more agents join the industry. In the same period last fiscal, almost 43,201 agents had quit the industry. Even in its annual report for 2013-14, IRDAI feels that high attrition may adversely affect life insurers’ business, policy persistency and public perception of the agency channel as a stable career.
Agents to click social media:
Life insurers are now taking help from credit information companies to ascertain details given by customers at the time of purchase of policy. This includes the identity and address details of the customers, while going forward insurers may look at credit history of the customers in the future to see whether they can pay renewal premiums on time in the future. Several insurers are now using services of credit information companies to verify details disclosed by customers while buying a policy.
With the help of credit data, they can do a speedy background check which helps in reducing the turnaround time and leads to more customer satisfaction. Apart from this, the rationale is also to check the propensity of customer to pay back which can end up improving the persistency ratio of the companies. Persistency, which refers to the ability to keep renewing a customer’s insurance policy till it reaches maturity, is measured from the 13th month onwards. The large life insurers have as high as 85-90% persistency in this period meaning that a large chunk of the policies are renewed, while the newer and smaller ones have lower persistency rates.
Apart from this, insurance companies are now also using it to avoid de-duplication. For instance, if a customer already has three life insurance policies then it is likely that he may default on one. Or on the other hand, if the customer already has a relationship with you then the company can offer him a better premium. At this point, services of credit information companies are being taken to get information of credit history; it is also being used for validating KYC details. Now that the Insurance Act mandates that no claim can be refused after three years, the risk assessment process has to be far stronger and needs to be built at the acquisition stage itself with help from credit information companies.
Those with a very bad credit history could also have a chance of rejection of their request to get an insurance policy. Further, pricing could also differ for those with a bad credit history if it is permitted by the regulator. These companies also come to the aid of insurers, at the time of claim settlement, to ensure that the money efficiently reaches the customer irrespective of the change in their location. Further, public sector is yet to warm up to this idea. Credit agencies agree that it is mostly the insurance companies from the private sector that are using the data.
Agents render persona-lised services:
Insurance agent only sells products of the insurance company he/she is associated with and, hence, is more like a representative of the insurer. And, like all representatives of a single company, expect personalised services with regard to premium payment or settlement of claims but you might not get unbiased advice. However, the IRDAI stress on need-based selling which has addressed this risk to some extent.
They might be handy for someone looking for a market-linked product like a unit-linked insurance plan (ULIP). A face-to-face interaction with the agent helps understand returns in different scenarios like a debt-light, equity-heavy option or vice versa. In the case of long-term life insurance products, customers should spend time with the agent to understand what the policy is going to fulfil, how it is a part of their overall financial planning and the duration for which they need to pay the premia.
The insurance intermediary market is generally competitive. However, competition is based more on quality than price. Thus, intermediaries do compete in the variety and quality of services they offer and in the success of the insurance programs they implement for their clients. In such an environment, intermediaries are competing with each other to design programs that add value.
Spawning enterpreneurs:
The life insurance industry has seen over 30,000 agents exit between April 2015 and February 2016. Lack of a continuous income flow and no proper career development has led to the decline in numbers. Even flexible incentives based on performance and business quality would be facilitated. Commissions have been raised by up to 50 per cent in the first year for term products. This is in order to enable them to do more business and earn more incentives. The regulator even went a step forward in order to boost the entrepreneurship spirit among insurance agents. It launched a new channel for selling insurance called insurance marketing firms where agents could set up their own firms. Insurers encouraged their agency force to be a part of this channel. However, only few agents expressed interest in this new structure where these firms could solicit insurance products, undertake insurance service activities, and distribute other financial products.
Till now, 14 Marketing firms have been registered. Apart from soliciting and procuring insurance products, almost all of them are also involved in back-office activities of insurers. Allowing these firms to work under insurance companies as a pilot would have given more agents the confidence to join this channel.
The life insurance industry has faced the challenge of agents leaving the profession. Data from the Life Insurance Council, the industry body for the life insurance companies, shows that companies have lost 51,278 agents in the financial year 2015-16. IRDAI has proposed higher commission for agents in the first year as also subsequent years to incentivise these distributors.
Insurance companies can give rewards over and above commissions. Life Insurance Corporation of India alone saw 1,02,044 agents exit in FY16. Private life insurers, on the other hand, made an addition of 50,766 agents in the last financial year. Higher transparency and stricter rules will also help to bring down mis-selling.
Various studies have shown that it is easier to cross-sell to existing customers rather than acquiring newer customers. For this, insurers are also looking at utilising their corporate group networks to sell products. However, in terms of personalised services, Agents are still the most preferred insurance intermediaries.
References:
1. https://www.irda.gov.in
2. http://economictimes.indiatimes.com/opinion/interviews/industry
3. http://www.lifeinscouncil.org
4. Newspapers and Journals.
