Page 36 - Life Insurance Today June 2015 SAMPLE

What constitutes the
commission structure
applicable for life
insurance companies

O ne of the major changes in Section 40B of the Insurance Act, 1938, adopt for as of now. Hence, the
insurance rules effected by the restricts the expenses of insurers immediate focus is commissions on non-
Insurance Laws Amendment according to the rules specified in life plans. The caps on commissions in
Ordinance is scrapping of section 17D. The limits are decided the case of non-life policies are leveled.
section 40A of the Insurance Act, 1938, based on multiple factors such as age
that prescribes the caps on commissions of insurer, its business in force and the Staying within the overall limits on
that an agent can get while selling you term of products sold. Section 40A commissions as prescribed by the Act,
an insurance policy. came within this overall limit and made product regulations in life insurance
commissions front-loaded. pegged the quantum of the first-year
With the section scrapped and caps commission to the premium payment
gone, the Insurance Regulatory and So, if an insurer is less than 10 years old, term: longer the policy, more the
Development Authority of India (Irdai) the first-year commission was capped commission.
will have the power to prescribe fresh at 40% of premium, at 7.5% in the
commission structures and change second and the third year, and at 5% So, in case the premium paying term of
commissions as required. But before we thereafter. For older insurers, first-year a policy is five years, the commissions
take a step ahead, let's take a step commission was capped at 35%. are capped at 15%. As the premium
back and understand the rules paying term increases to 12 years and
applicable till now. The Step Ahead above, the commissions payable in the
first year increases up to 35% in case
Previous Structure In case of life insurance, it seems the the company is at least 10 years old
Authority is not in a hurry, because and 40% in case the company is less
The expenses of life insurance product regulations in life insurance than 10 years old. The second- and the
companies, including commissions and came into effect last year. This had third-year commissions, however,
other operational and administrative brought in cost caps for unit-linked remain intact.
expenses, are capped under section insurance plans (Ulips) in the form of
17D of the Insurance Rules, 1939. This maximum reduction in yield to 2.25% This is the commission structure that's
rule describes the limits on expenses by the 15th year and thereafter. It had currently applicable for life insurance
that life insurance companies may incur also altered the commission structure companies, although we are yet to hear
from the premium income for a to some extent, and, therefore, the of the new commission structure for
particular class of insurance products. industry has a commission structure to non-life policies. (Source : Mint)

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32 June 2015 Life Insurance Today

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