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New Pension Scheme: Emerging Opportunity for Agents?

Administrator — Mon, 13 Dec 2010 05:40:35 +0000

Over one year after it was launched, the New Pension Scheme (NPS) for citizens has not succeeded and the main reasons identified are lack of publicity and the absence of a selling network.

The new Chairman of Pension Fund Regulatory and Development Authority (PFRDA), Mr Yogesh Agarwal says, “An immediate task before the PFRDA is to expand the distribution network of the NPS so that it is available within the easy reach of all citizens.”

Does this mean that insurance agents may have an additional opportunity coming their way?

K Nitya Kalyani explores.

Since its launch in May 2009, only about 7,500 Individual Retirement Accounts (IRAs) have been opened under the NPS for the unorganised sector all over India.

The scheme is open to anyone who is not

Mr Yogesh Agarwal, Chairman, Pension Fund Regulatory and Development Authority “An immediate task before that PFRDA is to expand the distribution network of the NPS so that it is available within the easy reach of all citizens.”

part of a compulsory, employer-run retirement benefit scheme, like the Employees Provident Fund Scheme for example. Even though the target population is huge and the scope is tremendous,the response has been negligible. A good comparison would be the Public Provident Fund (PPF) scheme, which is very common among investors.

In spite of being a good scheme structured with the investor’s interests in mind, there were flaws that made NPS fail.

A report examining the performance and nature of the NPS scheme, authored by consulting firm Ernst & Young, for Federation of Indian Chambers of Commerce and Industry (FICCI) was released at a seminar on “New Pension Scheme: – Prospects and Challenges” at Mumbai on November 9, 2010 organised by FICCI. The report was based on the findings of a survey of financial institutions done by FICCI.

The report, ‘India’s Social Security Needs: Imperatives for the new pension scheme’, says that the regulator has been “too aggressive in its attempt to keep costs low, leaving little or no incentive for distributors and fund managers.”

There was also no direct link between the investor and the fund managers and there were not enough efforts to spread awareness about the scheme, it says.

Here are the findings of the survey and an outline of the study report.

Mr Deepak Satwalekar, retired Managing Director, HDFC Life Insurance Company “The low-cost model has become a millstone around PFRDA’s neck. Pension requires intensive awareness campaign and hardselling with an appropriate incentive. Banks, post offices and associations alone won’t get you there. It is time to start attracting that much maligned-category called agents.”

Increase awareness

The study points out that there was insufficient publicity and awareness creation about the scheme to make it a ‘pull’ product so that it would be bought by the public without a distribution network. PFRDA, those responding to the survey expressed, needed to advertise and market the product more aggressively without which it cannot succeed.

Strengthen and incentivise selling

The scheme relied heavily on the investor himself coming forward to openan account and that is where it failed to take off.

Though there are 4,000 branches or retail outlets of about 35 Points of Presence (PoPs, the entities licensed to open and maintain IRAs) they were not sufficiently incentivised to ‘sell’ the IRAs as they were given a mere Rs 40 per account opened and Rs 20 per transaction. This system was based on the low-cost approach which has not worked.

Mr Praveen Kumar Tiwari, Executive Director, PFRDA “In the last three to four months we have been thinking very hard about the way forward. We have decided now that NPS is sold, not bought.”

The commissions offered were far lower than what competing products such as mutual funds and insurance plans offer and the PoPs were not enthusiastic about taking it on, especially the heavy infrastructure and training costs involved.

“Given the low levels of financial awareness in India, most investment products require persuasive selling techniques,” observes the study and the respondents to the survey also favoured ‘aggressive selling’ of the NPS.

Fund Managers should market it

There is no direct link between the investor and any one entity in the NPS scheme (See ‘Today I Have to Develop the Sector’, Premium, July 2008, Page 14 for details of the NPS Scheme). The study recommends that the Pension Fund Manager should ‘own’ the customer, and take the responsibility for marketing the scheme and signing up account holders. However, his fund management fees have been fixed at a ridiculously low 0.0009 per cent today and this hardly motivates him to spend on marketing to get customers.

Mr Puneet Nanda, Executive Director, ICICI Prudential Life Insurance Company “The core of the problem (with NPS) is there is no distribution system. We have to see which the appropriate distribution system is. The insurance agent is best qualified to advise, but he has to be incentivised, trained, mentored, managed and engaged on an ongoing basis. People want to talk to a ‘face’ and physical infrastructure is very important for the customer. But don’t restrict distribution to any one channel. ”

Recent initiatives

Some recent initiatives have been tried out to make NPS a success. They include the Swavalamban scheme where the Government gives a grant of Rs 1,000 a year for the first three years, NPS-Lite where the minimum annual investment is Rs 2,000 rather than Rs 6,000 and the charges are much lower than the normal scheme, marketing initiatives among the corporates in the public and private sector and the proposal under the Direct Taxes Code Bill to make NPS tax exempt on maturity, rather than taxable as at present.

Mr Ashvin Parekh, Partner and National Industry Leader, Financial Services, Ernst & Young Private Limited “International experience suggests that, unlike several successful pension systems, the NPS in India lacks distribution muscle. Therefore, there is a strong case for creating a model that relies on better incentivised sales agents.”

Mid-course correction

There appears to be a change in the thinking of PFRDA towards selling NPS through multiple channels with suitable commissions and incentives. This spells a possible new opportunity for the insurance agency profession which can add a very powerful product to its basket of financial planning products.

Chairman, PFRDA, Mr Yogesh Agarwal said at the seminar that course correction is needed for NPS and there would be a massive awareness campaign and a relook at the incentive structure as NPS required ‘substantial marketing efforts’.

These issues and their solutions are being studied by the G N Bajpai committee set up by PFRDA to solve the NPS problem. Going by PFRDA’s new stand and the discussions in open forums, there should be a new opportunity in the offing for insurance agents and any others who can sell NPS for an appropriate commission.

As Mr Deepak Satwalekar, retired Managing Director, HDFC Standard Life Insurance Company (Now called HDFC Life Insurance Company) put it: “Pensions need selling, not distributing’’. The customer has choices and the person who is selling has to spend time correlating the benefits of investing in pensions to the sacrifice of his money toward a long-term investment.

This person, he said ‘‘Will want to be compensated, and that compensation cannot be Rs 50!”

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Referral arrangements IRDA drafts new regulation

Administrator — Sat, 12 Jun 2010 18:00:59 +0000

Referral arrangements

IRDA drafts new regulation

Insurance Regulatory and Development Authority (IRDA) is proposing new regulations for referral providers for insurance sales.

It has released an exposure draft of the new regulations on its web site. (See “Highlights of the draft regulations”)

To be called Insurance Regulatory and Development Authority (Acquisition of Database for Distribution of Insurance Products) Regulations, 2010, the regulations are meant to codify the nature of a referral arrangement and the remuneration that can be paid for such services.

The exposure draft was put up on IRDA’s web site on May 18, 2010 and IRDA has invited comments on it be submitted on or before May 27.

Background

In a background explanation for the need of such a regulation IRDA has said that referrals “play a key role in making faster expansion of the sector and in reaching out to large chunks of population that may not be otherwise accessible through the conventional distribution channels of insurers.”

Some referral providers just supply databases of their clients to the insurance companies while others facilitate sales by introducing the clients to them, providing office space for the employees of insurer, displaying of publicity material and so on.

“Since the activities of a referral provider stop short of selling, they normally do not require a regulatory license,” it says.

Guidelines now

The existing guidelines on referrals are based on a circular dated 14.2.2003 which has some constraints. For example these guidelines deal only with Life insurance and not General insurance. It deals only with referral arrangement with banks and not with non-banking entities. It also specifies that a referral provider bank should not be a licensed insurance intermediary and a bank can have a referral arrangement with only one Life insurance company and one General insurance company.

Existing practices

IRDA noticed during its market conduct inspection that there are people entering into referral arrangements with non-banking referral entities and even with individuals.

Several different practices are being followed by the insurers with regard to referral fees resulting in high cost of acquisition which pushes up premiums for the policyholders.

In some cases, fees are staggered over a few years rather than being paid as a lump sum after the sale. Insurers claim that this is to encourage renewals but IRDA says that it is “questionable in view of the limited role envisaged for the referrals.”

The lack of guidelines on fee limits in case of non-banking entities and individuals has given insurers “unfettered freedom.” And in the case of banks some insurance companies “in their over-enthusiasm” have paid advances amounting to crores of rupees.

There are also extraneous clauses in their agreements since there is no standardisation.

Fresh guidelines needed

IRDA feels there is a need to streamline the fee structure for referral providers since referrals are seen to be increasing the already spiralling costs of insurers. Also, arrangements with non-banking entities and individuals need to be regulated.

There is a clause in the IRDA (Insurance Advertisements and Disclosure) Regulations, 2000 which allows a third party group or association to furnish the data of its members to an insurer and be compensated for this on the basis of sales made out of the references. There are no limits for these payment and some insurers have been making excessive payments towards references obtained by them. This provision requires to be scrapped, says the IRDA note regarding the draft regulations.

Clarity is required on the categories of entities that can take up referral activity to ensure that it is streamlined.

Govardhan Committee

The Committee on Distribution Channels, constituted by IRDA and headed by Mr N M Govardhan, retired Chairman of Life Insurance Corporation of India (LIC) which gave its report in May 2008 had made the following recommendations:

a. The expenses of management including referral fee should be capped by section 40B of the Insurance Act, 1938.

b. Referral fee should be paid only on successful conversion, with a linkage to sale by the company’s sales person and such fees and other costs incurred on the entity should not exceed the ceilings on commissions as provided under Sec 40A of the Insurance Act.

c. Trail fee, including other expenses, subject to the overall cap of section 40A, can be paid for the referral arrangements.

With regard to these recommendations IRDA has published draft regulations for eliciting opinion of the consumer organisations, policyholders, general public, insurance companies and various other stakeholders in the insurance sector. The draft along with the recommendations received from various stakeholders will be placed before the Insurance Advisory Committee and the Board of the Authority for their consideration, the circular says.

The following are the highlights of the draft regulations on referral providers

Defining ‘Referral Arrangement’

Referral Arrangement is an arrangement between a referral company and an insurance company in terms of an agreement entered into in connection with the sharing of the database of the customers of the referral company but does not include the soliciting or sale, directly or through an agent, corporate agent or an insurance intermediary including a micro -insurance agent of an insurance product.

Defining ‘Referral Company’

“Referral Company” means a company formed and registered under the Companies Act, 1956 (1 of 1956) and approved as such by the Authority under sub-regulation (3) of regulation 6.

Approval of a referral company

The draft regulations provide for IRDA to approve a referral company for a period of three years.

For IRDA’s approval of a company as a referral company, it has to be engaged in a business that has no linkage, direct or indirect, with the transaction or distribution of the business of insurance.

It should not carry out the sale or promotion of insurance products in its premises or elsewhere at all times.

It should have a net worth of Rs.50 lakh and a turnover of at least Rs.1 crore for the last three consecutive years.

It should have a database of its customers acquired through its business.

It should not be, by itself or through its subsidiary, associate or group company, licensed/ registered as an insurance agent, corporate agent, micro insurance agent or a broker under IRDA Regulations.

It should comply with insurance legislations and its rules and regulations

It should have a tie up with only one insurance company for one class of insurance business.

It should not be in any of the businesses of extending loans and advances, accepting deposits, trading in securities on its own account or on the accounts of the customers.

It should not be bound by any confidentiality agreement with the customers, on the matter of sharing their personal and financial databases.

Its total income from its referral business with an insurance company or any other organisation should not be more than 10 per cent of its total income in any year of the agreement.

It shall not acquire databases with the express purpose of selling it to insurance companies or any other organisations.

Registration of a referral company

The referral company should not undertake any insurance related activities except sharing of database of its customers for the sale or distribution of insurance products.

It should not create a database of its customer groups by specifically soliciting or scouting prospective policyholders, for the sale or distribution of the insurance products.

It should not provide details of its customers without their prior consent or provide details of any person/ firm/ company with whom they have not had any recorded business transaction.

It should not receive any payment from the insurance company for providing the database of its customers, over and above the remuneration as outlined in the regulations.

It should not receive any payment for providing the database of its customers from a person other than an insurance company.

Obligations of the insurance company

An insurance company’s referral fee to a referral company for acquiring its database should be within the overall commission limits provided for in section 40A of the Insurance Act, 1938 and should not exceed 25 per cent of the commission.

No fee is payable for the database of the same prospect more than once.

No fee is payable on renewal or on the sale of a new policy to an existing customer of the insurer.

No advance payments can be made.

No other payments can be made to the referral company by way of incidental costs, promotional expenditure, infrastructure costs and the like.

No payment can be made towards acquisition of any database after the date of termination of the referral arrangement.

Existing referral arrangements not conforming to the new regulations have to be terminated. They can be continued only if they are modified suitably within three months of notification as per the regulations.

In case of default

IRDA will be empowered to cancel the approval granted to a referral company and an insurance company shall not be permitted to enter into a referral arrangement with such a referral company for a period of three years after this cancellation.

Insurance Regulatory and Development Authority (IRDA) is proposing new regulations for referral providers for insurance sales.

It has released an exposure draft of the new regulations on its web site. (See “Highlights of the draft regulations”)

The exposure draft was put up on IRDA’s web site on May 18, 2010 and IRDA has invited comments on it be submitted on or before May 27.

Background

“Since the activities of a referral provider stop short of selling, they normally do not require a regulatory license,” it says.

Guidelines now

Existing practices

IRDA noticed during its market conduct inspection that there are people entering into referral arrangements with non-banking referral entities and even with individuals.

Several different practices are being followed by the insurers with regard to referral fees resulting in high cost of acquisition which pushes up premiums for the policyholders.

There are also extraneous clauses in their agreements since there is no standardisation.

Fresh guidelines needed

Clarity is required on the categories of entities that can take up referral activity to ensure that it is streamlined.

Govardhan Committee

a. The expenses of management including referral fee should be capped by section 40B of the Insurance Act, 1938.

c. Trail fee, including other expenses, subject to the overall cap of section 40A, can be paid for the referral arrangements.

The following are the highlights of the draft regulations on referral providers

Defining ‘Referral Arrangement’

Defining ‘Referral Company’

“Referral Company” means a company formed and registered under the Companies Act, 1956 (1 of 1956) and approved as such by the Authority under sub-regulation (3) of regulation 6.

Approval of a referral company