Insurance Agent Incentive Provision Risks Agent Exodus, Insurers Raise Serious Concerns
After the Nepal Insurance Authority pressured life insurers to strictly enforce the per-agent incentive expense limit under the Insurance Regulations 2081, insurers have warned that this could trigger an exodus of agents. The regulation caps incentives at 18 percent of each agent's individual first-year premium, a provision insurers call impractical and are demanding be amended.
Kathmandu — The Nepal Insurance Authority has pressured insurers to strictly enforce the per-agent incentive expense limit under the Insurance Regulations 2081. The Authority has warned insurers not to distribute incentives in violation of the regulations, cautioning that incentive expenses incurred after the regulations came into force will be deemed invalid.
Under Rule 44, Sub-rule (2) of the Insurance Regulations, life insurers may provide incentive amounts in addition to the commission determined by the Authority, provided they do not exceed the per-agent limit set by the Authority on first-year premiums. Before this provision took effect, life insurers had been distributing agent expenses equivalent to 18 percent of total collected first-year premiums, in addition to commission.
For years, life insurers have kept their annual incentive expenses within the 18 percent limit of total annual first-year premium income. However, the regulations stipulate that the incentive amount provided to each agent individually must not exceed 18 percent of the first-year premium that agent individually collects.
Insurers argue that since experienced agents bring new agents into the insurance profession, it is essential to provide them with incentive amounts. Very few people are willing to join the agent profession, making recruitment difficult. Experienced agents play a vital role in this, identifying potential individuals door-to-door, motivating them, arranging training for licensing, and bringing them into the profession.
Posak Raj Poudel, Chief Executive Officer of Citizen Life Insurance and former President of the Life Insurers Association, said the regulation's provision seeks to bypass the three-tier agent leadership structure.
"This provision of the regulations is completely impractical. In the Nepali market, expanding insurance reach and selling life insurance without a three-tier agent network is currently beyond imagination."
— Posak Raj Poudel, Chief Executive Officer, Citizen Life Insurance
Sushil Dev Subedi, Executive Director of the Insurance Authority, said insurers must fully comply with the provisions on agent incentives in the regulations.
"Insurers have complained that the regulation's provision is impractical and creates difficulties for the business. Until the regulations are amended, there is nothing that can be done immediately on this matter (by the Authority)."
— Sushil Dev Subedi, Executive Director, Nepal Insurance Authority
According to insurers, an analysis of agent retention in the life insurance sector shows that new agents contribute 60 to 70 percent of new business. After working actively for a few years, older agents reach a point of 'saturation' or gradually become inactive, and new agents take their place. To keep this cycle going continuously, it is necessary to recruit as many new agents as possible.
Alternative distribution systems for life insurance have not been well developed. 'Bancassurance' (banks selling insurance policies like insurance agents), practiced worldwide, is prohibited in Nepal. Nepal Rastra Bank imposed the ban after concluding that bank employees had engaged in misconduct. The share of term insurance sold directly through digital channels is extremely low.
In Nepal's life insurance market, out of annual first-year premiums of Rs 52 billion, term insurance and foreign employment term insurance contribute only Rs 3–3 billion each. This type of insurance contributes only 5.7 percent of new business. Of this, foreign employment term insurance is sold directly (online) and as compulsory insurance. Microfinance institutions and cooperatives have contributed as institutional agents in the distribution of term insurance policies.
Insurers complain that the Insurance Authority has yet to be policy-clear on whether to encourage or discourage individual agents in expanding insurance access. There is policy ambiguity on whether to promote or shrink the role of agents, whether to develop other distribution systems in parallel alongside agents, and how to promote alternative distribution systems, according to insurers.
"No one comes voluntarily to buy life insurance the way they come to deposit savings in a bank. Working in the agent profession is worthwhile."
— Posak Raj Poudel, Chief Executive Officer, Citizen Life Insurance