Life Insurance surrender value changes: The life insurance industry is undergoing significant changes with the new surrender value rules effective from 1st October. First-year commission for agents has been reduced by various insurance companies from 3% to 7%. Some private life insurance companies have also introduced a clawback of agent commission if policy is surrendered within the first 2 years, according to ET NOW sources.
These changes are to improve policy persistency, reduce mis-selling, and also impact the margins of insurance companies as they have to provide higher surrender values starting from the first year.
Read More: Rs 5 crore MSME loan for Agniveers: How much guarantee coverage available under CGTMSE?
First Year Commission Reduction
One of the changes is the reduction in first-year commission for new business. Various insurance companies have reduced this from 3% to 7%. This is to align the commission structure with the long-term performance and persistency of the policy. As a result, the subsequent trailing commission has been increased and is now linked to the persistency of the policy. So agents will earn more if the policyholder continues the policy for a longer term.
Clawback of Agent Commission
Apart from the change in commission rates, some private life insurance companies have introduced a new policy to clawback agent commission. If a policy is surrendered within the first 2 years, the commission paid to the agent will be clawed back by the insurance company. This is significant because under the new surrender value rules, insurers have to provide surrender value if a policy is surrendered after the first year. By clawing back the commission from agents if policy is surrendered early, companies want to discourage mis-selling and ensure policyholders fully understand the policy before they commit.
Read More: Prime Minister Internship Scheme: Monthly Stipend Of Rs 5,000 – Check Eligibility And Other Details
Impact to Agents and Insurance Companies
While these changes are to reduce mis-selling and improve policy persistency, they also pose challenges to agents. Clawback of commission means agents could lose money if policy is surrendered early. This new strategy is to encourage agents to sell more responsibly and ensure policyholders are well informed.
For insurance companies, the new surrender value rules impact their margins as they have to provide higher surrender values from the first year. To mitigate this impact, companies are adopting different strategies, such as reducing the first-year premium or clawback of commission paid to agents.
