Financial Solutions

Debate regarding life insurance agents restricted to sell insurance policies of only one insurance company

In India, Insurance Regulatory Development Authority is the government body regulating the insurance market. Included in the role is “specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents.”

Current regulations by IRDA restrict individuals to act as agent for only one life insurance company at a time (exclusivity clause). This may appear surprising keeping in mind that one of the goals of IRDA is “promoting efficiency in the conduct of insurance business.” If agents are allowed to sell policies of different companies, they can compare different products and suggest ones which they think serve the interest of a client best.

Suppose, I am enrolled as agent for PNB Metlife. What happens if I find a Term Plan from LIC and Money Back Plan from PNB Metlife compelling at the same time for a client? If I put the interest of client first, I end up losing my commission because of suggesting Term Plan from LIC which he gets done through an LIC agent going forward. The other option is to suggest a Term Plan product from PNB Metlife thereby compromising with the noble stand of “client first.” This fact is indirectly admitted by IRDA when their study note for agents defines brokers: Insurance brokers are allowed to sell products of more than one or many insurance companies. They have the advantage of being able to compare the insurance products of various insurance companies and then offer a plan that best suits the requirements of the customer. The plus with brokers is that they can keep the interest of the customer in mind and offer him the product that best suits him, cutting across company lines.

The remedy then lies in allowing agents to have the right to represent all insurance companies (or a number of companies they choose to apply) by single registration so that they can bring into table benefits of comparison. This feature will also make agents more trustworthy in the eyes of clients as the same should reduce instances of forced selling.

It is not that the issue of exclusivity is not in the mind of regulators. The Report of the Committee on Distribution Channel constituted by IRDA (May 2008) states: The exclusivity clause in the regulation currently restricts the agent from working with more than one insurance company. In order to provide a comprehensive product range to the consumer with comparison across products, it is proposed that the retail insurance agent be allowed to contract with multiple insurance companies.

An agent represents an insurance company while broker represents buyers of insurance policies. Until 1999 (with the formation of IRDA), LIC had a monopoly in life insurance business. There was little need to make a distinction between an agent and broker as both were selling products of LIC. Now, there are 23 life insurance companies competing and an agent can represent just one company while a broker can sell products of all the 23. If exclusivity clause is removed, there will be little difference between an agent and a broker. Becoming an insurance broker is a costly thing. An applicant seeking to become an insurance broker needs to have minimum 50 lakhs of INR as capital (Direct Broker), two hundred lakhs (Reinsurance Broker), and 250 lakhs (Composite Broker) as per IRDA (Insurance Brokers) Regulations, 2002. There is an annual fee of INR 15,000 for direct brokers, INR 35,000 for reinsurance brokers, and INR 50,000 for composite brokers. It appears that special privilege of brokers is safeguarded by not allowing agents to represent multiple companies.

Like many other businesses before the advent of the internet, face-to-face contact was considered essential in selling a product and insurance no exception with agents bringing a bulk of business for an insurance company. Now, at a time when direct sale of insurance policies by visiting the website of an insurance company or use of comparison websites is picking up because of the internet that eliminates intermediaries like agents, role of agents, especially in cities and towns with audience comfortable using PC, is redefined. It can no longer be offering and collecting data from clients which can be done by clients themselves through online means. The challenge for agents is to provide more value-added services by including insurance as part of complete financial planning. This is one of the reasons why Chartered Accountants with IRDA license are in an advantageous position to secure more insurance business because of involvement in preparation of final accounts of clients (statutory auditors are, of course, not allowed to sell insurance policies at the same time to clients under section 144 of the Companies Act, 2013).

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