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Insurance regulator, IRDAI, will do well to follow the example set by SEBI in protecting investors. Insurance companies manage more money than mutual funds and it is essential that the insurance industry is regulated with the interest of policyholders in mind. As of March 2015, insurance companies managed ₹22.5 lakh crore while MFs managed about ₹10.82 lakh crore. But while SEBI has been tightening its vigilance on distributors and mutual fund houses, IRDAI actions are not entirely in investors’ favour.
SEBI has taken a series of steps this calendar year to tighten disclosure norms for mutual funds, much to the ire of the distributors. It has asked MFs to disclose agent’s commission, including pay outs in the form of gifts and trips and annual salary of those earning above ₹60 lakh. The watchdog has also directed fund houses to show clearly the impact of the expense ratio on the schemes’ returns for direct as well as regular plans.
But IRDAI has not done enough to curb mis-selling in the insurance industry or to ensure transparency. Traditional insurance policies continue to be front-loaded with commission and exit of an investor in the initial few years resulting in a loss of 50 per cent or more for the investor. The IRDA’s exposure draft on commissions of insurance agents which came in January this year is also loosely knit. The rules again give leeway to insurers to pay a fat 30-35 per cent of the first year premium as commission to the agent. This reduces to 7.5 per cent from second year and 5 per cent from the sixth year.
As if this is not enough, it also suggests that insurers can pay an additional 20 per cent of the first year commission as ‘reward’ to individual agents (40 per cent for other intermediaries). IRDAI should ideally go by the recommendations of the Sumit Bose Committee and move insurance policies to a trail commission structure. Only when commissions move to a trail-based structure will agents have an incentive to service their customers and sell them the right policy.
Chief Research Analyst
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