IRDA should look at it from not just revival of lapsed policies, but from customer service angle

The Insurance Regulatory and Development Authority (IRDA) has recently issued an exposure draft on orphan life insurance policy. The guidelines allow 100% of renewal commission to allotted agent for revival of lapsed policy as well as future renewals. At present, a new agent is entitled to renewal commission of only 50% of what the procuring agent would have been entitled had the policy continued to be in force and that too if lapsed policies required medical examination.

The guidelines are good for life insurance agents who help in revival of lapsed policies which were sold by another agent. But the details are in the fine print. The renewal commission can be paid to the allotted agent only if the original agent who sold the policy is not entitled to the commission. This is a big if, as per insurance regulations.

Under Section 44, except on grounds of fraud, an agent who has served an insurance company for a period of five years shall be entitled, subject to certain conditions, to renewal commission on policies if s/he discontinues his agency. Agents who have completed 10 years of service with a given insurance company and stops for any reason his/her agency business but does not join another company are entitled to renewal commission on all such policies which they had placed. The agent’s heir will get it even after the agent dies. It is contract between an agent and the life insurance company as renewal commission is just deferred compensation which cannot be taken away if the agent has completed certain time with the insurance company. LIC continues to pay many former agents renewal commission even though they no longer continue in the business. In such cases, the lapsed policy even if revived by another agent will yield the allotted agent zero commission. It will go to the original policy seller or heir. Which agent would be interested in reviving policies in such cases?

According to IRDA guidelines, orphan policies are those that are “initially sold by an insurance agent whose services were subsequently terminated or removed from the rolls of the insurer excluding those policies to which the selling agent is entitled to renewal commission under provisions of Section 44 of the Insurance Act.” It means that the policy is not an orphan even if it is lapsed as long as the policy seller is entitled to renewal commission based on number of years with the insurer. In effect, IRDA’s initiative to have the insurance company allot lapsed policy to another agent and give the allotted agent the renewal commission is only applicable to the small subset of lapsed policies.

Addressing the issue of lapsed policies by incentivising agents is welcome step by IRDA, but who will help to revive the lapsed policies wherein the policy seller is still entitled to commission even though s/he is no longer with the insurer or may be even dead? If IRDA is looking to revive lapsed policies, it has to think of ground realities.

As a veteran life insurance agent asks: “Who will help such customers with services like loan processing, change of nomination or even filing to death claim? The agent who sold the policy is gone (left the insurer or dead) and there is no allotted agent to the policy for any kind of servicing. Life insurance companies keep renewal commissions when the policy seller is not entitled for renewal commission. It happens as many agents leave the business after one or two years. The insurer should use these funds to give incentive for agents to revive a lapsed policy even when the policy seller is entitled for the commission, but has left business after completing required years or dead.”

Insurance companies we spoke to have taken a different stand. According to them, “The policy seller does work to help in the renewal of policy even when s/he is no longer selling new policies. They are interested in continuation of renewal commission which can be substantial and hence they don’t want the policies to lapse.” If the agent has left business and is doing other things in life, how much time will that person have for servicing the sold policies?

IRDA also has put the onus on the insurance company to allocate the lapsed policies to another agent to helping policy revival. Till now, it was mostly initiated by the agent who would help revive lapsed policy sold by another agent and ask the insurance company for 50% of renewal commission. As per the draft, insurers shall take into account the track record of the agent and complaints registered against an agent while allotting the orphan policies. It is unclear what will be the process for insurance company to allot one agent over the other when many fit the same criteria. Whether the allotted agent is interested with renewal of the existing policy or to sell new policies to earn high upfront commission is another story.

IRDA has requested comments to the draft, but there is no email address which used to be given in other draft documents. It means there may be inconvenience in giving feedback. Comments if any on the above exposure draft may be forwarded to the following before 31 March 2012 - Joint Director (Life), Insurance Regulatory and Development Authority, 3rd Floor, Parisrama Bhavan, Basheerbagh, Hyderabad - 500004

While a life insurance agent can get renewal commission after leaving the business and even passing it to his/her heir, a general insurance agent does not get anything. Most of the general insurance policies are renewable every year and there is no concept of renewal commission payment if the agent has left business or dead. It’s something on the wish-list of general insurance agents.