Page 130 - DCOM103_COMMERCIAL_LAW

Unit 12: Law of Agency

Notes

Case Study Financial Planning in Insurance
ver the years, it has been almost a standard practice for the agents of Life Insurance
Corporation to give their customers a part of their commission. They usually paid

Othe first quarter’s premium on behalf of the customer. That this practice is illegal,
is a fact, and therefore not a matter of opinion. However, there are two views over whether
the law should prohibit this `rebating’, or not.
Most life insurance companies support banning of rebating, although they all agree
that monitoring this is almost impossible. “There has to be a change in awareness level
for all customers to refrain from rebating,” says Ms Suniti Ghoshal, Head-Corporate
Communications, Aviva Life Insurance (formerly, Dabur CGU Life Insurance).
“This industry has been with a monopoly player, hence certain things have only been done
without being questioned much,” Ms Ghoshal said, in an e-mail to Business Line.
Other insurance companies agree. “An agent rebates in order to shorten his sales cycle. This
shortening of process often leads to misrepresentation resulting in poor service quality,”
says a spokesman of Max New York Life Insurance. However, another point of view of
the same issue is that there is no point in prohibiting rebating by agents, which is any way

extremely difficult to monitor. Advocates of this view point out that in most countries;
insurance companies are even allowed to extend credit to their customers for premiums. In
India, a claim is payable if and only if the premium has been received in full. Rebating is in
a way an informal credit extended to the customer by the agent.
After all, the agent is paying out of his pocket. Why prohibit rebating only in the insurance
industry, when discount is a way of life in all other industries?
But insurance companies do not like it. Mr Dilip Gazaaro, Head-Retail Sales, HDFC
Standard Life, says that his company actually dismissed an agent for rebating.

At Aviva, the Financial Planning Advisers are trained to handle such demands, says Ms
Ghosal. “They can explain the customer as to why he needs to pay the agent for his service.
If the customer can pay substantial amounts for premium, he also needs to ensure that
the advice he receives and the service he avails of for his policy are the best in terms of
quality and integrity.” Max New York Life’s spokesman echoes similar views. “We as an
industry are also establishing a code of conduct against such practices. At the Life Insurance
Executive Council, we have recommended that the penalty for rebating be increased from
` 500 to ` 10,000.” There are others who believe that rebating should continue to be illegal,

no matter how difficult it is to monitor. Says Mr N. Raveendran, Director, Alegion Risk
Management Services (which proposes to become a general insurance broker), “Legalising
rebating would drive away the serious agents who do not usually give rebates”. He says
that there would come a time, when the society matures enough to be willing to pay for a
service, that rebating will automatically go away.
After all, you don’t necessarily go to the doctor who charges the least. But legalising
rebating would push back the arrival of such a time.
Question
Discuss the financial planning advisor role in insurance industry. (Hint: Basically fi nancial

advisor is a main person who involve more and more in the planning of insurance sector.)

LOVELY PROFESSIONAL UNIVERSITY 123