Development officers as captive brokers?

"The concept of captive brokers should be seriously considered if the four public sector general insurance companies are to retain their lead in the business", announced Mr. R. Vasudevan, national coordinator of the All India General Insurance Field Workers Association. He added that this would also help the companies cut costs by repositioning their pool of development officers. {In the public-sector insurance set-up, the development officers represent the marketing arm of the insurance companies}

According to him, as the minimum capital adequacy for insurance brokers, as stipulated by the insurance regulator, is Rs. 25 lakh the companies could fund broking ventures set up by their development officers. "If this is done, the companies will not lose much business and talent. But the modalities of this have to be worked out by the General Insurers (Public Sector) Association (Gipsa)", he added.

He stated that the entry of the private sector into the insurance business is going to pose a serious challenge for all the four public-sector insurance companies. Besides fighting hard to retain their existing profitable business they will also have to contend with higher premium procurement costs.

Already some new insurance companies have reportedly approached high-performing development officers of the public-sector with an offer to pay 15 per cent commission on all the businesses placed with them. The interesting part of this is that the officers, instead of joining the private companies, can place business with the new players after meeting the target fixed by their employers.

Meanwhile, the two-and-a-half day meeting between Gipsa and GIC Development Officers' Association at Chennai last week ended without any concrete outcome. The meeting was called to discuss the threat of the private sector, strategies to retain the existing business and the issue of repositioning development officers to cut costs.

"It turned out to be a sort of an exploratory meeting. We were disappointed as the management did not put forth any new proposal", laments Mr. Vasudevan. Incidentally, this was the first industry-wide restructuring issue that Gipsa took up after its constitution.

As a percentage of the total management cost, remuneration to development officers – their salary, profit incentives and other perks – accounts for a significant percentage for all the four public sector general insurers. For instance, in the case of the Chennai-based United India Insurance Company Ltd., nearly 3 per cent of its premium is spent on its development officers. This translates to around Rs.70 crore.

"Incentive schemes for development officers were devised some years ago. They now need to be updated," points out Mr. K. N. Bhandari, chairman and managing director of United India and chairman of Gipsa.

Gipsa wants to reposition development officers, as the entry of corporate agents/brokers would push up intermediation costs of its members. In the new scenario, brokers will get paid 17 per cent of the premium procured by them and agents will be paid a commission of 15 per cent, compared to the present rates of that vary between 5 and 15 per cent.

"The average cost of intermediation will go up to 12.5 per cent," explains Mr. Bhandari. He has a reason to worry. Applied on United India's last year's gross domestic premium income of Rs. 2,348 crore, the intermediation cost comes to around Rs.293 crore. The actual commission paid for procuring business is just Rs. 85 crore.

Various ideas are being floated to reposition the existing marketing cadre. One idea is to convert all of them into administrative cadre as class I officers. "Some of the converted officers could be then used for damage survey jobs", Mr. Vasudevan suggests.

Those development officers who want to continue marketing should be given a two-year sabbatical leave with an option to join as an officer after the leave period. The person should be then designated as chief agent with the responsibility of developing an active agency force. The remaining could always be given attractive voluntary retirement packages, he says.