Cancelled policies hit insurance agents hard with commission recalls

Insurance companies are seeking to recover commissions paid to agents and brokers on canceled long-term policies abandoned by clients as a result of tough economic times.

The value of policy surrenders according to the Insurance Regulatory Authority (IRA) has hit Kes10.3 billion over the third quarter of last year, as clients pulled out of products such as life assurance, pension, and investment products.

Policy surrenders jumped from Kes4.2 billion in 2020 to Kes17 billion in 2021 and have remained on double digits as salaried employees who have lost their jobs due to the Covid-19 pandemic drop premiums, considered an ‘unnecessary expense’ during these tough times. 

The long-term contracts usually range between 10 to 15 years providing insurance companies with locked-in revenue for the duration. Cancellation means the insurance firms have to withdraw investments and forgo the revenues and recover costs.

This means that early withdrawal after a minimum of three years will see the customer get a percentage of the premiums paid called surrender the value.

Agents on the other hand are required by some of the big companies to pay back the commissions they have been earning on the premiums which is recovered from their current paychecks in a practice called clawing back. 

A claw back happens where commissions paid up to the intermediary are forcibly taken away from them at a future time from other commissions payable for business delivered.

Typically, agents earn a minimum of 40 per cent of the premiums as commissions in the first year which progressively comes down 25 percent in the second year and 15 percent in the third or five percent until maturity, which means the agents now owe insurance companies billions. 

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“An education policy is about Kes5,000 translating to about Kes60,000 a year if your client leaves after two three years you are looking at a huge sum, and what we are seeing is that some agents just decide to quit rather than pay up,” Oush, an insurance broker said. 

Agents are finding new ways to cope including diversifying revenue lines to leverage on general policies as long-term insurance suffers. 

Initially, agents were only limited to either long-term or general policies and were tied to at most three underwriters but the IRA relaxed the rules allowing agents to cross-sell long and short-term insurance and to book business with any underwriter.

Agents say they are also advising clients to either reduce the amounts of premiums payable or defer payments for a period until they get their finances right.

Those who cannot continue paying their premiums are being told to hold their investment instead of making a withdrawal and earning less than the sum assured. 

“The cancellations are increasing because of the hard-economic times, is someone has lost their job, they cannot continue paying the premium, so it is tough,” Oush said.

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