The way life insurance policies are sold in India may change forever following a recommendation by the Insurance Regulatory and Development Authority of India, or Irda, to scrap agent commissions that customers have to pay even when they buy insurance directly from companies, either online or by walking into an insurance company office.

A senior Irda official said that customers who buy policies directly from life insurance firms should not be charged such commission.

This game-changing recommendation follows two similar investor-friendly moves in the past few weeks. The Securities and Exchange Board of India, or Sebi, discontinued distributor commissions in the mutual fund industry after August. A committee headed by pension regulator D. Swarup has recommended that all upfront commissions paid to distributors of financial products should be scrapped by April 2011.

The average commission, according to Irda's latest annual report, is 16.25 percent but can go as high as 40 percent in some plans such as unit-linked insurance products, or Ulips, and endowment plans.

The move to abolish agent commissions for direct applications will ensure that the entire premium paid by investors is put to work, thus increasing total returns on the investment.

"Irda recommended in July that following the amendment of the Insurance Act, the regulator must get the power to make it mandatory for life insurance companies not to charge agent's commission to a customer who buys a policy directly," said the Irda official, who did not want to be named.

"There is a clear case that customers who apply directly to buy a policy should not be charged the same way as others who come through agents. Lowering the charges for direct customers will also ensure a healthy relationship between the customers and their insurance companies,"said R. Kannan, member (actuary), Irda. "The matter is before Parliament at the moment."

This is one of the proposals made by Irda in a draft Bill in the Rajya Sabha, the upper house of Parliament.

Irda chairman J. Hari Narayan said, "Indeed, such a suggestion has been made in the draft proposal. In fact the proposal also talks about conferring power to the regulator to determine the commission structure for intermediaries."

At present, a section of the Insurance Act prevents any rebate on commission charges or on premium paid by customers either directly or indirectly. Even though removal of commission is different from rebating, Irda has recommended changes in this section to ensure no agent commission for direct sales.

Even in the case of direct applications, the charges remain the same. This means, if a customer pays a premium of Rs1 lakh in the first year, about Rs40,000 of this is deducted as agent's commission. From the second year onwards, the charges can be in the range of 5-10 percent. At least a few firms, including ICICI Prudential Life Insurance Co. Ltd and Max New York Life Insurance Co. Ltd, have started offering certain policies that levy lower commission if a customer buys the product directly.

Bajaj Allianz Life Insurance Co. Ltd too recently launched a product where customers can have the benefit of lower premium allocation charges when they buy online, said Kamesh Goyal, CEO, Bajaj Allianz. "The objective is to make available products suited for various channels and the customer then decides which channel they prefer to buy from."

Puneet Nanda, executive vice-president of ICICI Prudential Life Insurance, said theoretically, it was a good proposal but may be difficult to implement. "This is because agents play a crucial role in ensuring quality sales. Insurance is a complex subject and agents play a vital role in educating customers before selling a policy."

Mathur does not see any immediate impact on business as only a "small portion of sales comes from direct application".