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Agents and their relevance to the insurance Industry - Business Standard

28 September, 2009

Insurance and agents are two words that seem to be inextricably linked in our minds. If you think of the word insurance, then the word agent will instantly pop up in your brain.
This is a symbiotic relationship based on trust and mutual benefits and both the parties are the poorer without the other. The media has of late been abuzz with the Swarup committee recommendations of phasing out of commissions payable to agents. This has understandably caused consternation to both the parties, more so for the many hapless agents who stand to lose their only source of livelihood.

As the insurance industry becomes ever more intensely competitive, distribution is the mantra that is on the minds of every insurer. We are a huge country with a large uninsured population that is scattered across countless towns, cities and villages, both accessible and remote. Prohibitive costs and logistics make it impossible for insurers to access every potential customer and this is where agents with their distribution reach are indispensable to insurance companies.

The abolition of commissions may not spell the death knell for the industry but it will certainly decelerate the pace of growth of the industry which will struggle to access new business. Distribution reach is not the only specialty of agents but there is also the special relationship that they enjoy with their customers. While insurance companies employ diverse channels to access customers, be it the online medium, telemarketing, bancassurance and the like, the personal touch that an agent brings in his interactions with customers cannot be replicated.

The true agency model in the actual sense of the word, is built on the special relationship between the agent and the customer where the service is more enhanced. In fact, a professional agent has sold more than one policy with a single customer. An agent does not just sell a policy to a customer, he also explains the terms and conditions, advises the customer on the policy that would best suit him taking into consideration his lifestyle, finances and occupation, such as a health, personal accident or a critical illness. He also runs around to complete all the documentation for renewals, new policy issuance and even assists in claims. In the process, he earns the unshakable trust and gratitude of the customer which cannot be replaced by a telecaller or an interactive chatzone on the website of the insurer. It is for these very reasons that agents are also called insurance advisors. This does not undermine the importance of other channels which also have their own importance in the scheme of things depending on the psyche or lifestyle of the customer, his general awareness, location, whether a small town or a savvy big city dweller etc.

The online medium is most suited for the net generation who are stressed for time, know what they want, have no patience for social niceties, want to get down to business and expect instant results.Another important factor we cannot ignore is that innumerable agents belong to small towns and commissions are their only source of livelihood. Revoking of commissions would be a heartless decision rendering thousands of families without a source of income and we need to seriously empathize with their plight.

In the west, an insurance agent can get different commissions from different policies even though the policies may cost the same amount, ranging from 25-30 per cent. In fact, most states in the US require an agent to share with the customer exactly how much commission he stands to make on various policies and customers are encouraged to question their agents about their commissions before deciding on a policy. This information helps a customer decide which agent is acting in his best interest and is seen as a litmus test is a customer is unsure if his agent is trustworthy or not even though the rate of commissions cannot be the sole deciding factor about the suitability of the policy for the customer. A recommendation from an agent to a customer buy a policy that pays low commissions is seen as a safe bet that he is acting in the interest of the customer. This is not to say that an agent trying to sell a policy that pays high commissions is being dishonest but it is felt that customers who have more information are enabled to make informed decisions with greater degree of confidence. Also, a health insurance policy is legally required to cost the same no matter whether the agent makes lower or higher commissions.

The insurance industry in America also has a regulator similar to IRDA in India although the scenario there is vastly different in terms of the size of the industry and the freedom for product innovation.The IRDA regulator, Harinarayan in a recent interview expressed his unequivocal disapproval of the Swarup committee recommendations on agent commissions and believes that such a move would kill the industry at this stage of development. His words have instilled some confidence in the industry and we sincerely hope that the government will not make a decision that would be detrimental to the growth of the industry and at the same time tear apart the lives of thousands of families who would lose their only source of financial sustenance.