The finance ministry is likely to favour the continuation of the commission model for the insurance sector. This would be contrary to the suggestions made by the Swarup Committee on Investor Awareness and Protection in its discussion paper that the commission structure for the insurance sector should be phased out by April 2011 in favour of a fee-based system.

A finance ministry official said that implementing the recommendations is not likely as financial literacy in India is low and it is too early to move away from commission model to an advisory model. “There is lack of financial awareness in the country even among the educated population, leave aside the rural and uneducated population. Till our society becomes more financially aware, till the point we start asking for services, it is not possible to implement this move. In smaller towns, agents have helped with insurance penetration,” the official said.

Insurers have helped the government in working towards financial inclusion. “While mutual funds have mostly spread to the metros, insurers have spread to the remote areas through services of agents. There have been cases of misselling but one cannot ignore the role of agents so far," said the official. “Most of the insurance products in India are transparent and they spell out various charges deducted and benefits offered in the policy document,” he added.

J Hari Narayan, chairman, Insurance Regulatory and Development Authority (Irda), had earlier gone on record against the proposal to phase out the commission structure. He said it was a premature step given the width and the depth of the Indian market where there is a need to nurture a much closer relationship between the policyholder and agent.

The Swarup committee recommendation would impact all 3 million insurance agents who serve 188 million investors. D Swarup is also the chairman of the Pension Fund Regulatory and Development Authority.

The Swarup committee recommended upfront commissions embedded in the premium paid be reduced to no more than 15 per cent of the premium immediately. In 2010, this should be brought down to 7 per cent and a zero-commission structure should be in place by April 2011. The interim period should be used by insurance companies to help their agents make the transition to a more mature way of selling and advising, the committee report said. The committee recommended that the sales process should be documented and customer profiling will be mandatory before an adviser sells a product.