19 Mar 2016

Compensating Insurance Agents

The IRDA, which has suffered from regulatory capture and is in cahoots with the insurance industry, has permitted an anti-consumer move: it increased the first-year commissions insurance agents can get. As the linked article says, first-year-commisions are a problem because it encourages mis-selling. By the time the customer realises they’ve been conned, the agent has already earned their commission.

This is not abstract — it happened to me. An LIC agent lied to me and sold me an unnecessarily costly policy.

If insurance agents earn yearly commissions, they should be at the end of each year, rather than the beginning. In other words, no commissions for the first year. If the customer realises before that they’ve been duped, the agent doesn’t earn money.

Commissions should not be permitted to increase. They should either be the same each year, or increase every year, not decrease. A decrease means front-loading the commissions, which causes the problem mentioned above — the agent has already earned most of their commissions by the time the customer realises they’ve been cheated. So, commissions should be the same every year, or increase over time.

Taking this idea one step further, agents should be paid only if the customer keeps the policy till maturity. Let’s say I buy a 30-year policy that earns the agent a commission of ₹10K per year. The agent earns nothing till a year from the date of purchase, at which time they earn 10K. Another years goes by and they earn another 10K, for a total of 20K. And then I realise I’ve been lied to and they discontinue the policy. Then the 20K already paid to the agent is adjusted against other payments that will be made to them by the insurance company, whether in the form of commissions from other customers, salary, reimbursements, or whatever else. This will cause agents who cheat their customers to not earn any money for months or years at a stretch when they’re discovered. This will cause them to leave the company, which is exactly the incentive we want.

We need such regulations that align interests for agents and customers.

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