Insurers say ULIPs shouldn’t be based on a fee-based model

ULIPs should remain commission based, say insurers, as intermediaries play an important role in selling the product

For a long time now, many have commented and expressed their views that insurance agencies’ big ticket success, unit-linked insurance plans (ULIPs) should be a fee-based model and not a commissioned based model. However, insurers disagree with the view, reasoning that intermediaries play a vital role in selling ULIPs—most of them are sold through relationship models and there would hardly be any change in the cost for the consumer to pay.

“How would the fees be decided? For that matter, how would an employee or agent be motivated to bring in more renewals? It is definitely not feasible,” a top official from Bajaj Allianz said. Most ULIP products are sold in rural and semi-urban areas.

Rajesh Sud, managing director and chief executive officer, Max New York Life Insurance, said that intermediaries play an important role in the selling of ULIPs to potential consumers. A fee-based model would not be fair to an agent, he added.

“Not many understand the risk we live under—either dying too early or living too long, somebody has to help you understand that risk and appropriately help you understand the product,” Mr Sud said.

Life Insurance Council’s secretary general, S B Mathur said a fee-based model wouldn’t work as nearly 80% of ULIPs are sold in rural and semi-urban parts of India and most of these sales are based on mutual relations. “Most of these sales are relationship-based, where it is very awkward for an agent to charge his client for doing his work,” he said.

The argument lies that ULIPs overcharge consumers, through the commission-based model. As per the Insurance Regulatory and Development Authority (IRDA) rules, agents are entitled to get a commission of up to 40% of the premium in the first year, as compared to mutual funds or pension funds.

Regardless of whether the charges are levied on a fee-based model or commission model, the policyholder’s charges would inevitably not be affected, in fact, he might pay a higher amount, Mr Mathur said.

Unlike mutual funds and pension funds, which are no-load products, ULIPs continue to charge high commissions. In August last year, the Securities and Exchange Board of India (SEBI) had removed loads on mutual funds.

Commenting on mutual funds, Mr Mathur said that mutual funds are not yet a retail-based industry, with 80% of funds still being corporate funds. He also said that their level of operations were only limited to metros and urban areas. “So why extend it to an (insurance) industry, which over a 10-year period has created a huge distribution network and where the sale of insurance is predominantly in rural areas,” he asked.

A fee-based model is considered a fair deal for consumers as it enables them to directly evaluate the service an intermediary gives them and it also compensates intermediaries. It gives the consumer the opportunity to negotiate the fees to be paid to agents instead of the charge being embedded in the premium.

In the past, there were reports circulating that consumers who had invested in ULIPs would be free from this commission from April 2011. However, the insurance regulator has decided to maintain the status quo.




7 years ago

Fee based structure is ideal for the investors. The argument that the commission structure helps renewals is not correct. The insurance companies squeeze the agents for the business in the first 2 to 3 years and leave them for not achieving the quota. Only few remains and insurance companies make clean income of the unpaid renewal commissions and policy lapses. The annual quota system need to be abolished as it is with Mutual Funds and fee model has to be introduced to make everyone responsible and accountable.

Prof. Bajaj

7 years ago

I think Mr. Deshpande has made a very valid suggestion.

Rationalising the commissions to a 3-4% levels will ensure remuneration to agents as well as reduce costs for the investors. And in most cases, the agents are left with a commission only in that range after kickbacks. So why not make it official as well ?

S P Deshpande

7 years ago

As per the Insurance Regulatory and Development Authority (IRDA) rules, agents are entitled to get a commission of up to 40% of the premium in the first year, as compared to mutual funds or pension funds. As there is always an insurance cover risk related matter in traditional insurance plans as well as in ULIPs, some sort of upfront commission should be there but not so heafty. The ceiling should be immediately brought dowm from 40% as of now to mere 4% for the first year, and nominal 1% for the rest of the term. The investor in ULIP & regualar insurance products will be benefitted by this move & also will curb/vanish kickbacks.


7 years ago

Very funny,Now insurance companies are talking about common people living in rural or semi urban areas & who don't understand the risk we live under-either dying too early or living too long.Then what efforts have been taken by insurance companies & IRDA to educate these people about importance of life insurance. Also what steps has been taken to provide maximum insurance as per need of a individual.The answer is nil.
Till now these companies never educate even their advisor's about the importance of life insurance.These companies only promoted the returns in ULIP through their advisor & advertisements.IRDA as a regulator silently watching all this but not taken a single action.
Now when SEBI taken an action then all including IRDA were shouting about the future of industry & all are now saying that a common man will remain without insurance(very funny.Data shows these companies provided below 1 lakh average insurance for a average premium of 20000)
Now IRDA & Insurance companies are showing sympathy about common man.But the question is whether they have taken care that the family after the death of common man will live as they are living before.
So my opinion is that the court & Govt. should order these companies to refund the premium of policies where very low insurance was provided compared to the amount of premium.Also a new regulator should be appointed for insurance companies.

Dillip kumar swain

7 years ago



7 years ago

I was reading an article in Business Standard on the glut of MBAs in the market and how many of them fail to get placements post their course. In one of the other posts here, I had mentioned how I was forced to send a few MBAs who were working in my office due to the banning of commission on Mutual Funds. Come to think of it, there could be many people like me across this country who can create jobs for these youngsters. Because of some stupid and overzealous reporting by a section of the financial media, SEBI took the step of abolishing commissions on the mutual funds, which have had a direct impact on the employablility of a large number of students.

When my brother in law, who is working in US for a software company got bonus during the recession there, his company urged them to SPEND this money and not save. The logic was simple, more spending in the market would create more demand for goods and services, which then would reduce the impact of recession. I dont know how many of them followed this, but if you look at it from the mutual funds & insurance commission perspective, it makes ample sense.

A mere 2% commission on mutual funds will not create a huge difference to the investor. But it does to a consultant and the people he employs. Just to quote you one instance, two of my juniors working in my office have recently purchased Hero Honda bikes. These two are young MBAs who have completed one year at my office. These two Hero Hondas what they have bought, in a very very insignificant manner, has added to the bottomline of this company , which in turn has impacted the share prices. The result is higher NAVs for those funds who have a stake in Hero Honda. Therefore indirectly, the investors are also being benefitted.

If this is not value creation, then what is?


7 years ago

@ Suresh, you have not yet answered my question of making salaries paid to all the staff in an organisation completely variable, depending purely on their performance on a monthly basis!! Let all the companies be transparent in what they pay to their employees. Do you think, you as an individual, will agree to that?


7 years ago

It is true that commission based model may not work for insurance sector. Look at the situation of NPS, although it is a better product, subscription is very low. Because there is no incentive for agents to sell it. Even though, government has agreed to par Rs. 3,000 over the period of 3 years, very few people are going for it.

Rather than curbing agent's commissions, IRDA should start auditing every policy sold by them to contain the mis-selling.


7 years ago

MF brokers have been denied mere 2% commission with so much service and responsibility involved-while insurance agents get 40% upfront and 5% renewal-and this renewal also to be bothered by client bcos his insurance cover will cease or he will loose surrender value-

R Balakrishnan

7 years ago

How can 'retail' penetration justify a bad product? It is a fallacy to presume that insurance is a must. If it were, by now insurance cos world over would have gone bust. The fact that they thrive, proves that they have created a need and 'sell' it.
Anything outside a term policy touches on the domain of 'investment'. Hence, SEBI should be the regulator for all products launched by insurance companies, other than pure term policies.

jignesh n vyas

7 years ago

In all insurance product charges are nil. And agent should charge fee to coustmer. In insurance more thane 80% agent are part time business. If fee base modul it is very good for real agents. At present mutual fund is very good for smaller investore.

Suresh Ramasubramanian

7 years ago

It is a pity that they trot out the half truth that the "customer doesnt have to pay more". Sure he pays the same premium, only agent commission and insurer management fees don't chew up 40% of his premium, and the fee is transparent, upfront.

Pharma firms get Rs2,150-crore notice for overcharging

The government has found out that certain companies have been selling medicines at higher prices to consumers than those fixed by the National Pharmaceutical Pricing Authority

The chemicals and fertilisers ministry today said that it has issued demand notices for over Rs2,150 crore to various pharmaceutical companies for overcharging consumers, reports PTI.

The government has found out that certain companies have been selling medicines at higher prices to consumers than those fixed by the National Pharmaceutical Pricing Authority (NPPA), minister of state for chemicals and fertilisers Srikant Kumar Jena told the Rajya Sabha in a written query.

“Based on detection of overcharged cases during August 1997 to April 2010, the NPPA has issued demand notices in 746 cases involving an amount of Rs2,150 crore,” Mr Jena said.

Of this, only Rs192.04 crore could be realised till 30 April 2010, leaving a balance of Rs1,958.39 crore. Out of this, as much as Rs1,877.67 crore is under litigation and pending in various courts, he added.

As per the provisions of the Drug Price Control Order of 1995, the government fixes or revises the price of medicines and no company can sell any scheduled drug at a price higher than the one fixed by it.




7 years ago

What was the Ministry doing in 1997? Is some one responsible in the Ministry?

MoCA asks SFIO to prosecute SHCIL Services

SFIO has completed the investigation into SHCIL Services and has issued instructions to initiate prosecution against the company

The Ministry of Corporate Affairs (MoCA) has asked the Serious Fraud Investigation Office (SFIO) to initiate action against SHCIL Services Ltd in respect of violation of various provisions of the Companies Act, 1956. SHCIL Services is the broking arm of Stock Holding Corporation of India Ltd (SHCIL). SHCIL, originally set up as a depository, has been embroiled in a serious scandal that was being investigated by the Central Bureau of Investigation (CBI) and the SFIO.

Corporate affairs minister Salman Khurshid in a written reply to the Lok Sabha said that out of 22 cases, investigation reports in respect of two companies were submitted by SFIO. Necessary instructions for action in respect of violation of various provisions of the Companies Act, 1956, have been issued to SFIO, he added.

According to information available on the NIC server, SFIO has completed investigation of SHCIL Services and issued instructions to file prosecution against the company. The other company is Satyam Computer Services Ltd. The SFIO has submitted its report and issued instructions for filing prosecutions on pure company law violations against Satyam.

Between 2004 and 2009, the SFIO has filed prosecution proceedings in the matter of 32 companies against 632 accused, including individuals as well as companies.

SHCIL, the parent of SHCIL Services has been deeply mired in a controversy for its e-stamping project planned several years ago. Last November, the company announced a staggering cash dividend of 900%. According to informed sources, this entire dividend was the amount SHCIL earned by selling its 2% stake in the National Stock Exchange (NSE) for about Rs250 crore.
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