Thursday, April 22, 2010

Incentive structures in insurance products

The present incentive structure allows high front-loading of agent commissions, rues Sanjay Tugnait, Managing Partner, Accenture Financial Services. “An agent is paid as high as around 40 per cent of premium for the first year for certain products, 7.5 per cent for the second and third years and 5 per cent for the following years. The proposed structure suggests that the upfront commission embedded in the premium paid be immediately cut to not more than 15 per cent of the premium, falling to 7 per cent in 2010 and nil by April 2011,” he adds, during the course of a recent email interaction with Business Line.

The reference is to the Swarup Committee’s recommendations, about investor awareness and protection, seeking to bring the selling of insurance products in line with mutual funds and the New Pension System. Mutual funds went no-load from August 2009 with the SEBI’s aim to make advisors the agents of customers rather than of the asset management company whose funds they sell, Tugnait reminds.
The existing motivator composition lets large front-loading of professional commissions, rues Sanjay Tugnait, Managing Partner, Accenture Monetary Products and services. “An professional is compensated as increased as all around 40 for every cent of advanced for the very first 12 months for selected items, seven.five every cent for that 2nd and third decades and five for each cent for your subsequent decades. The proposed shape suggests the fact that upfront fee embedded inside advanced settled be promptly lower to not greater than 15 every cent on the high quality, falling to seven for each cent in 2010 and nil by April 2011,” he adds, throughout the course of the current e-mail interaction with Organization Collection.

The reference would be to the Swarup Committee’s recommendations, about investor recognition and safety, looking for to provide the marketing of insurance coverage solutions in collection with mutual cash along with the New Pension Method. Mutual resources went no-load from August 2009 while using SEBI’s aim for making advisors the brokers of shoppers instead than in the asset management corporation whose finances they promote, Tugnait reminds.

“The Swarup Committee has equivalent aspirations for proposing how the insurance plan business do apart with agents’ commissions and rather entitles agencies to acquire by way of charges – this sort of that providers are reimbursed for their advisory support, alternatively in the assured commissions, which by default place the onus around the good quality of program supplied by agencies.”

Excerpts from your interview.

What exactly is the have to have for this new motivator framework in insurance cover?

In standard, the commission-based product is related with providers although the fee-based design is meant for monetary advisors. Objections on the commissions setup go again on the training of mis-selling, which manifests as big churn rate and lapsation of guidelines coupled with client complaints.

In a very aggressive setting – these kinds of as India’s, with new players and solutions released each other day – the higher front-loading payment framework is thought to lure providers to churn a coverage thereby diminishing the motivation to program the coverage inside more time operate.

For instance, the complicated construction of ULIPs is complicated for a lot of clients to comprehend and typically ULIP products and solutions are acquired with larger returns in brain. But quite a few a time shoppers are offered ULIPs which are possibly ill-suited to their monetary wants or even the product or service capabilities usually are not transparent good enough. By transforming the motivator construction to fee-based, the Committee aims to strike along at the incredibly root of inappropriate economic information.

Why is there resistance to accept the advised inducement shape?

For the common Indian, insurance plan is nonetheless offered and never acquired, for the reason that value of an insurance coverage product or service will not be embedded in his or her thoughts. Some clients are informed of insurance plan but then additional as an expenditure product or service and never a danger cover. Real estate agents and also other stakeholders have got to commit plenty of time educating the client to discover his or her intrinsic desires and create interest to purchase the merchandise.

If insurance policy corporations shift to some type wherever investors spend charges soon after negotiations as a substitute of commissions, the shortage of economic consciousness from the Indian buyer will likely be a deterrent and volumes will probably be strike.

The Committee’s recommendations of pure fee-based style will grow to be pertinent only when fiscal literacy prices in India improve to some amount that folks start off acquiring insurance plan on their personal. There exists a massive populace in urban, semi-urban and rural locations which is nonetheless unaware and uninsured. Provided that Indian insurance policy can be an changing marketplace, the Committee maybe could allow the commission- and fee-based models coexist for now, and shift to some fee-based product at a later on stage.

How are other nations handling this concern?

A number of international locations are inside the procedure of adopting the fee-based shape. A latest case could be the UK, which announced that it is going to proceed into a fee-based process from 2012. Australia as well favours the fee-for type and offers for more significant transparency inside income course of action, as real estate agents should declare on the commence from the suggestions method what they are going to acquire as soon as the insurance coverage sale goes ahead.

The European Union a short while ago mandated for insurers to produce the underwriting procedure additional transparent and to explicitly present the fees for marketing a plan which can be imposed about the policyholders.

Apart from these regulations, raising buyer demand for impartial advisory companies is driving the current market. In Germany for example, the broker gross sales funnel as well as the tied-agent coexist, however the tied-agent funnel is historically a lot more dominant within the living insurance coverage small business.

Insurers all around are experimenting on what runs far better. An fascinating situation will be Honorarkonzept in Germany. In May well 2009, Belgium’s Fortis Group set up this corporation to offer you insurance plan guidelines without the need of commissions because it determined an escalating willingness of German clients to shell out for good quality guidance. Other insurance cover companies could also advertise their items through Honorarkonzept. But it is as well early to say if Honorarkonzept will show to become an impartial revenue funnel as planned, or will turn out becoming a tied income funnel for Fortis products and solutions only.

On the entire, motivator structures in everyday living insurance plan are dissimilar and increasing in diverse international locations. You will discover successes and shortcomings in each products.

Is there no win-win option then?

Considering incentives on your own could be a narrow strategy. A holistic look at is necessary. As I stated before, the root on the debate on commission- versus fee-based motivation framework may be the exercise of mis-selling. Coaching and sensitisation of product sales force to purchaser requirements strikes at this root. As Indian shoppers obtain personal consciousness and their program demands improve, insurers will anyway ought to get ready their real estate agents for that eventual transformation to “advisors”.

The broader matter facing insurance cover corporations will not be that this should lower or do aside with commissions, but how they lead to revenue productiveness and enhance the agents’ call-to-conversion ratio.

For the huge vast majority of agencies, the revenue from insurance cover is appallingly minimal which is usually attributed to their absence of expertise. Insurance plan corporations can boost efficiency for occasion, by rendering it obligatory for all providers to consider refresher courses to create item expertise and soft ability in advertising. Automation can successfully assist insurers deal with the income funnel. Expenditure in gross sales commissions techniques, gross sales force management, and tight integration into coverage management methods, will facilitate efficient monitoring in the product sales organisation.

Insights from client funnel, merchandise along with info could be leveraged to inform techniques these kinds of as customer-agent segmentation and tiered support amounts. Such type of insight, when fed back again to your professional promptly, contributes to informed decision-making on the point-of-sale and assists assemble relationships.

Is it actually only about commissions? We have to reflect below. Alternatively of striking commissions, sensitising and exercising agencies, industrialising solution improvement and managing the overhead charge of servicing could be additional efficient inside revenue-versus-profit battle. A holistic look at of gross sales and services optimisation will go a extended way than incentives on your own in getting the Indian insurance plan marketplace to your subsequent frontier of maturity. In general, the commission-based model is associated with agents while the fee-based model is meant for financial advisors. Objections to the commissions set up go back to the practice of mis-selling, which manifests as high churn rate and lapsation of policies along with customer complaints.

In a competitive environment – such as India’s, with new players and products launched every other day – the high front-loading commission structure is believed to lure agents to churn a policy thereby diminishing the motivation to service the policy in the longer run.

For example, the complex structure of ULIPs is difficult for many customers to understand and often ULIP products are bought with higher returns in mind. But many a time customers are sold ULIPs that are either ill-suited to their financial needs or the product features are not transparent enough. By changing the incentive structure to fee-based, the Committee aims to strike at the very root of inappropriate financial advice.

Why is there resistance to accept the recommended incentive structure?

To the average Indian, insurance is still sold and not bought, as the importance of an insurance product is not embedded in his or her mind. Some customers are aware of insurance but then more as an investment product and not a risk cover. Agents and other stakeholders have to spend a lot of time educating the customer to identify his or her intrinsic needs and generate interest to buy the product.

If insurance companies shift to a model where investors pay fees after negotiations instead of commissions, the lack of financial awareness of the Indian customer will be a deterrent and volumes will be hit.

The Committee’s recommendations of pure fee-based model will become relevant only when financial literacy rates in India increase to a level that people start purchasing insurance on their own. There is a large population in urban, semi-urban and rural areas that is still unaware and uninsured. Given that Indian insurance is an evolving market, the Committee perhaps could let the commission- and fee-based systems coexist for now, and move to a fee-based model at a later stage.

How are other countries handling this issue?

A few countries are in the process of adopting the fee-based structure. A recent example is the UK, which announced that it will move to a fee-based system from 2012. Australia too favours the fee-for model and provides for greater transparency in the sales process, as agents must declare at the start of the advice process what they will receive once the insurance sale goes ahead.

The European Union recently mandated for insurers to make the underwriting process more transparent and to explicitly show the costs for selling a policy that are imposed on the policyholders.

Apart from these regulations, increasing customer demand for independent advisory services is driving the market. In Germany for instance, the broker sales channel and the tied-agent coexist, though the tied-agent channel is historically more dominant in the life insurance business.

Insurers all over are experimenting on what works better. An interesting case is the Honorarkonzept in Germany. In May 2009, Belgium’s Fortis Group established this company to offer insurance policies without commissions as it found an increasing willingness of German customers to pay for quality advice. Other insurance providers can also sell their products via Honorarkonzept. But it’s too early to say if Honorarkonzept will prove to be an independent sales channel as intended, or will end up being a tied sales channel for Fortis products only.

On the whole, incentive structures in life insurance are dissimilar and evolving in different countries. There are successes and shortcomings in both models.

Is there no win-win solution then?

Looking at incentives alone may be a narrow approach. A holistic view is needed. As I mentioned earlier, the root of the debate on commission- versus fee-based incentive structure is the practice of mis-selling. Training and sensitisation of sales force to customer needs strikes at this root. As Indian customers gain financial awareness and their service demands increase, insurers will anyway have to prepare their agents for the eventual transformation to “advisors”.

The broader issue facing insurance companies is not that the need to cut or do away with commissions, but how they contribute to sales productivity and improve the agents’ call-to-conversion ratio.

For a vast majority of agents, the income from insurance is appallingly low which is also attributed to their lack of expertise. Insurance companies can enhance productivity for instance, by making it mandatory for all agents to take refresher courses to build product knowledge and soft skills in selling. Automation can effectively help insurers manage the sales channel. Investment in sales commissions systems, sales force administration, and tight integration into policy administration systems, will facilitate effective monitoring of the sales organisation.

Insights from customer channel, product and other data can be leveraged to inform strategies such as customer-agent segmentation and tiered service levels. Such insight, when fed back to the agent on time, contributes to informed decision-making at the point-of-sale and helps build relationships.

Is it really only about commissions? We need to reflect here. Instead of striking commissions, sensitising and training agents, industrialising product development and managing the overhead cost of servicing can be more effective in the revenue-versus-profit battle. A holistic view of sales and service optimisation will go a longer way than incentives alone in taking the Indian insurance market to the next frontier of maturity.

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