New surrender value norms only realign agent fees, no impact on margins: LIC chief
MUMBAI: Amidst threats of a nationwide strike by its agents to force LIC not to change their commission structure or lower the fees, the national insurer has denied any such plans, saying there is no question of them getting lower commissions as we’ve only re-aligned the fee structure and not reduced them.
The insurer also said the new surrender value norms will not impact its margins as it has already tweaked its products.
Last week various association of LIC agents, who run number over 1.3 million, feared that like their peers in the private sector, they too will see their commissions falling after the regulatory mandate to offer higher surrender value from this month, to protect insurer’s margins, have threatened a national strike after Diwali to force the management from going ahead with any such plans.
“The total commission that an agent used to get from us before October 1 remains intact. The perception that we’ve reduced the commission is a totally incorrect. What we’ve done is that we’ve re-aligned the commission by adjusting the current fee structure. But ultimately, under the new structure also an agent will continue to get what she was getting earlier,” Life Insurance Corporation chief executive Siddhartha Mohanty told TNIE here Tuesday.
Mohanty was responding to a question from this newspaper about the Corporation’s plans on the agent commissions after the regulator Irdai asked life insurers to offer higher surrender value, which is can go up to 85 percent premium paid, even from the first quarter of the second year of a policy, against the earlier practice of paying back from the third year of a policy on surrender or cancellation of a policy.
Private players are fearing at least 100 bps hit on their margins following the new norms which came into play from October 1.
The new rules on surrender value, under which a policyholder is eligible for surrender value after paying the first year premium on cancellation or porting out, has prompted LIC to restructure commission payouts, drawing protests from some agents’ associations. The agents are planning to hold demonstrations across branches.
“We’ve only adjusted something here and there from the total commission, which has been misconstrued as a reduction in the fee. What we’ve done is that we adjusted some portion of the commission. Under the new plans, what they were getting in the first year will paid in the second year. That’s all,” Mohanty told TNIE on the sidelines of a CII event on the insurance sector without offering details.
On the impact of the new surrender value norms on the Corporation’s margin, he said, “there will be absolutely no impact on our margins because of this new norms. We’ve already tweaked our products to align them to the new regulatory structure,” which was in the making since December 2022.
Mohanty also said, “a person does not buy a policy to surrender it because even under the new norms, she will incur losses. So I don’t see any impact coming in from this just because people don’t buy a policy to surrender it or port it out.”
The Life Insurance Agents’ Federation of India has written to its members, exhorting them to exert pressure on LIC to withdraw the changes towards reduced commission payouts as well as a “clawback clauses” being introduced after the new special surrender value norms were implemented.
“To incorporate one-year surrender value, LIC has made many changes without consulting any of our organisations. The changes are neither agent-friendly, nor policyholder-friendly,” says a letter from the association, which has planned a series of demonstrations at LIC offices until October 30, according to its website.
Agents’ biggest worry is that LIC will recover the commission paid to the agent in the first year if the policy is surrendered.
While the rules were already applicable to new products launched since then, the regulator granted life insurers time till September 30 to re-file their existing plans to comply with the new norms.
The new special surrender value norms will impact endowment policies the most, say to the tune of 85 per cent if a policyholder chose to terminate her policy because of mis-selling or inability to pay premiums for any other reason.