The world is changing….

I have a feeling!

A feeling that we are on the cusp of a defining time for what the financial services industry will look like to a customer in the future!

The world about is going to change very, very, quickly hereon, and most of it for the good of the customer!

There is a combination of factors and events which will make this change happen

  • Recent actions by SEBI have changed the way in which Mutual Funds are distributed. A customer does not have to pay entry loads to an AMC anymore for new purchases. Customers who require advice now transact and fix the rate for service / advice directly with the Licensed Intermediary. Customer not wanting to pay for the advice can invest directly with Mutual Funds and not pay the entry load or commission. Consequently the rate of churn has reduced and direct investment by customers has increased.
  • The Insurance Regulator (IRDA) and the Securities Market Regulator (SEBI) have been engaged in a war of words over turf over who controls ULIPs, the unit linked, investment focussed, insurance plans. The root cause for this has been the feeling within SEBI that ULIPs are stepping into turf which has traditionally been serviced by Mutual Funds; and concerns that mis-selling has been rampant in selling these insurance linked plans as purely investment plans – where the high cost structure and penalties for early withdrawal have not been appropriately explained to customers.
  • The IRDA on its part has been taking a number of steps since 2005 to reduce the sale of “investment oriented” ULIPs with conditions such as minimum Insurance cover, reducing the charge structure etc., and is expected to tighten these even further

The facts are that in the past, customer interest has often been compromised for the highest commission that can be made on a product – this has been the case across asset classes, whether mutual funds, life insurance, deposits, cards or other.

Vested interests have controlled the sales process and the flow of information to customers. Often, low charge products with low commissions are not even carried by the seller or customer advised to buy these.

But that is not the real story!

The story of interest from a customer viewpoint is the combination of changes that are either on their way or are proposed – which will likely change the products, and the way these products are sold to customers, forever.

The two main players (with due respect to SEBI) that will change the landscape forever are IRDA and the Tax Department.


  1. The first change that is coming is the revised disclosure norms that have been prescribed by the IRDA for the Insurance sector. Many of these disclosures will enable customers, intermediaries and other stake holders to gauge performance by insurance companies across various factors such as capital adequacy, expense & profitability, customer service – lapse rates, claims and complaints ratios and time to resolution.
  1. The game changer, however, is that come July 1, Insurance companies are going to disclose the commissions paid to intermediaries to the customer. The question will be how this is enforced and how intermediaries work around it. For an aware customer, if he/she seeks information, he/she will know how much commission is charged on the product being sold to him/her.


  1. As we mentioned in our earlier Blog (see: The New Direct Tax Code) the new direct tax code has proposed changes to the EEE regime to move to an EET regime.
  1. The change in qualification under section 10.10.d for life insurance products is also likely to increase customer preference for products providing a higher risk cover compared to “investment” oriented insurance products.
  1. The exemption amount under the EET regime is also proposed to be increased from the current Rs 100,000 to Rs 300,000 – encouraging customers to save more now for the long term under qualified investments. Tax deferment can be quite beneficial over a long term product due to the beneficial effects of compounding.


  1. IRDA is mandating a number of changes to Insurance and Pension products to make them more “insurance” oriented as well as increase customer benefits
    1. Pension Products and Top Premiums are now required to provide life cover equal to 5x the pension premium paid annually
    2. Surrender charges are proposed to be modified to ensure that if a customer holds a ULIP for more than 5 years, there will be no surrender penalties levied on the product.

The combination of these changes and proposed changes will change the industry and how customers buy products forever.

With distributors having to explain the commissions payable to them, as customers become more aware, there is a likelihood that lower commission / lower charge products will become available to customers.

Insurance companies are already working on developing products that will offer customers added benefits in the changed environment.

Online sales of products by Insurance Companies and by Intermediaries are likely to increase; and the role of independent comparison sites should hopefully increase in enabling customers to find the right information, product and price.

To give a contextual reference… the move to “Direct” in the UK in General Insurance happened in 1999 when Direct Line launched an online vertical for sale of Insurance products. The products were sold directly online, cut expenses, and passed these low costs directly to customers. The result was that within 3 years, Direct Line had 30% of the Online Insurance market in the UK; forcing other Insurers to follow suit.

In the absence of independent providers of information and content that serve as “gate keepers” and “enablers” for customers to reach out to insurance companies that offer them the best deal, intermediaries will control the flow of information as has been the case in the past.

Regulations should encourage free and transparent dissemination of information to customers that enable customers to make informed choices!

© June 2010