While finance minister P Chidambaram publicly admonishing insurance firms for mis-selling life policies has put the focus on a problem many policyholders can testify to, what’s not clear is why the insurance regulator has done little about this. It’s not as if the Insurance Regulatory Development Authority (IRDA) has been caught unawares; it has been flagging the issue regularly in its annual reports. IRDA’s analysis shows mis-selling or unfair business practices jumped from 7.6% of total customer complaints in the life insurance industry in 2009-10 to 32% in 2011-12. Such a steep rise in mis-selling is predominant in conventional policies after curbs were placed on unit-linked plans in 2010. The curbs on Ulips ensured that insurers had to cut the commission they paid to agents from as much as 40% from the first year premium to around 5% now, making it less attractive for distributors.
If this wasn’t enough to alert IRDA that something was seriously amiss in industrial practices, the ‘persistency ratio’ of life insurance policies—the proportion of policy holders who pay their premium after 5 years—has been consistently falling, especially for private sector insurers. That means, after policyholders are finding the policies they’ve bought don’t meet their needs, they are stopping payments on them. That clearly means the fines IRDA puts are so small, this is not making any discernible difference. Which is why, after growing for the past few years, the life insurance business registered a negative growth of 1.57% in the total premium income in 2011-12 as compared to a growth of almost 10% in 2010-11. This is bad news for the industry and speaks poorly of the way the IRDA is regulating the sector. IRDA has come out with some solutions like limiting commissions for agents who don’t have a 50% persistency in the first year—for the sake of the industry, we have to hope this will work.