The old order changes

substantial reduction. The charges that have been capped are likely to come down significantly from their present levels. According to research done by Edelweiss Capital,premium allocation charge is likely to drop to 14-16 per cent in the first year from its current level of 25-80 per cent. It is likely to drop to 3-5 per cent in the second and third year and to 2-4 per cent thereafter.

With fund management charge having been capped see box,expect policy administration charge to rise towards the upper end of its current range,which is Rs 300 to Rs 750 per year.

With margins on Ulips set to come down,insurers will try to maintain their profitability by focusing more on agent productivity and persistency lower premature termination of policies.

Lower commission to agents. Insurance companies will be forced to lower the commission that they pay their agents. According to research done by Edelweiss Capital,insurers will have to bring down the first-year commission to agents to below 10 per cent. Currently these commissions range from 15 to 25 per cent. Insurers will also have to lower the renewal commission rates paid to agents by 1.5-3 percentage points from their current levels.

Distributors will earn lower commissions going forward. However,distributors preference is unlikely to change as life insurance will remain a relatively high-commission product compared to mutual funds. However,expansion in branch network and agency force will get curbed for some time, says Vishal Goyal,analyst at Edelweiss Capital. Since insurance companies will now look to enhance their operating efficiency,there could also be lay-offs of unproductive agents.

Greater reliance on brand and bancassurance channel. With insurers ability to pass on distribution costs to customers curtailed,the reliance on agents to push sales will perforce have to come down. Brand recall will become a bigger factor in sales. Brands like SBI that enjoy easy countrywide recognition and recall will stand to benefit.

Reliance on bank branches,which have low fixed costs,is expected to increase for sale of insurance. Players like SBI,HDFC and ICICI that have large branch networks are expected to emerge stronger.

Surrender charge likely to rise. The insurer has capped several charges: premium allocation charge,policy administration charge,fund management charge,and mortality charge. However,surrender charge has not been capped. Therefore,one can expect that insurers will in future raise this charge,and perhaps the period for which it is levied say from three years to five or seven years. This will have two effects. On the positive side,it could result in higher persistency as customers factor in the high cost of an early exit. On the negative side,this will increase the inflexibility of Ulips: if a customer has been mis-sold a Ulip and is not satisfied with it,he will find it more difficult to exit it. Hence,customers will have to do greater due diligence to ensure proper fit before buying a Ulip.

Expect a shift towards traditional and capital guaranteed products. With the margins on Ulips set to come down,insurers will no longer rely as much on them as in the past. The directive regarding cap on charges has left traditional products out of its ambit. Hence these products could regain some of the popularity that they enjoyed in the LIC era before the insurance sector was opened up to private players.

Explicit costs levied for offering guarantees have not been included among the capped charges. So expect more capital-guaranteed products to be launched.

Mortality charge may be exempted. Among the charges that have been capped,mortality charge has also been included. The industry has complained that this will prevent Ulips from providing adequate life cover. Since this demand appears to be quite reasonable,the regulator may at some stage remove it from the list of charges that have been capped.

All of the above might lead one to think that the insurance regulators latest directive will have a negative impact on the insurance industry. While profitability could shrink in the short- to medium-term,in the longer run,by increasing the internal rate of return IRR that customers earn from Ulips,this directive is expected to enhance their popularity and make them more competitive vis-à-vis mutual funds. According to analysts,the current level of charges was in any case unsustainable: competitive pressures would have forced insurers to bring them down over the next three years or so. The regulator has only brought forward that day.

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