The life insurance industry continues to face the menace of mis-selling. Even the finance minister publicly admonished insurers on the practice. The industry recorded a degrowth of insurance premium in 2011-12, while insurance penetration slipped to 3.40 from 4.60 in 2009. It is evident that no serious attempt has been made to find a way out.
The agent is the main source of business insurance. However, there is no stability in the agency channel. Continuing the trend of attrition of agents, in 2011-12, the number of agents appointed was 7.14 lakh, while termination figures stood at 9.95 lakh.
Training of agents has not brought any qualitative improvement in the agency, notwithstanding the huge investment by the industry. If we look at the cost-benefit analysis, the survival rate of agents after three years declines sharply. An agent in the first year spends R1,250, which amounts to R124.50 crore for 9.95 lakh agency terminations in one year. There are other imputed expenses. Assuming the sum of R5,000 on training and maintenance per agent for the same number, the figure works out to R497.50 crore. This is an eye-opener as to the effectiveness of the channel.
As per reports, companies thrive on lapses. For example, HDFC Life reported profits of 88.3% due to lapsed policies. This figure for Kotak Life is 80%. The higher the average premium, the greater the lapses. The link is proved by the fact that the average premium of HDFC Life is 54,473, while for Kotak Life, it is 73,762.
The so-called ‘agent’ seems to have become a source of exploitation for his contacts. I have known cases where the policyholder has been misled into investing huge amounts without proper guidance and the companies are unable to provide any relief.
Mis-selling has assumed such alarming proportions that HDFC Life served a notice on LIC for its agents leveling allegations of mis-selling against it, while the LIC has come out with advertisements cautioning policyholders from unscrupulous entities offering misleading rewards.
The bancassurance channel has been added to the already crowded list of sources of mis-selling. The free-look period expires due to manipulation in delivery of policy with the result that the clients feel cheated. There is an imperative need for the life insurance industry to instil confidence in the minds of the public to fulfil the role of economic prosperity that it enshrines. It needs to be pro-active in identifying and tackling the problems of mis-selling to regain the trust of the people.
Following ways could be considered, both by the insurer and the regulator, to check rampant mis-selling.
Regulations to proclaim mis-selling as a fraud in tune with the Regulations “Prohibition of Fraudulent and Unfair Trade Practices relating to Security” issued by Sebi for sale of mutual fund schemes;
In order to check money laundering and quality of sale, the data of Cibil should be referred to verify or record financial standing of all customers. It should be mandatory after a particular limit;
People need to be involved in the sale process. Most clients sign on the dotted line and, later , they rue their fate;
Online selling with discounting in premium and selling by cross-mutual support by way of discounts in premium to those having medical insurance and similarly those opting for medical insurance having life insurance will improve quality of sales;
The mutual fund industry has been successful in creating awareness about systematic investment plans to spread the cult of investing. Similarly, the insurance industry needs to create better awareness about the ECS facility to ensure regularity in payment of premium;
The insurance industry is known to manipulate the number of sales by splitting over a period of time to avoid detection of compliance of regulations. The industry must evolve a mechanism to classify each sale to an individual during the course of one financial year by cross-checking facts;
The lapsed policy premium should not be part of the profit and be transferred to a especially created policyholders fund, which can be used to compensate proven cases of frauds;
Unit-linked products are highly complex. The switching facility, a well-intended provision, is again beyond the understanding not only of the common people but also for the field force involved in sale of Ulips. Therefore, such products should be sold only to those who have experience in holding shares in a regular demat account of duration of minimum of two years. In fact, Ulips must be marketed only by agents who are qualified to sell MFs.
The incentives of foreign jaunts and expensive gifts must stop immediately as it proves to be big source of mis-s-selling;
There is also a need to rationalise returns on selling. When an agent sells a life insurance product in making payment of R1 lakh premium, he gets R40,000 and a mere R100 for pension fund product. Obviously, this is temptation to force-sell life insurance, which unfortunately has driven to malpractice of rebating.
The banking industry has embarked on an expansion mode by moving to several villages with a population of 2,000 through business correspondents. The insurance industry has no such strategy in hand. It can rope in business correspondents for selling of insurance products in their areas.
All deposit accounts in banks and retail loans, which as per RBI figures stand at R6,22,752 crore, should be covered by life insurance. Imagine the sense of relief the family will have on being protected against repayments of housing, consumer durable, credit cards and other loans on death of account holder.
The life insurance industry is focused on short-term gains and needs to make a choice for long-term outcomes aimed at satisfying customer needs. This, it can do by employing qualified and educated staff who can come up to the challenges involved. Let not the industry destroy itself by overlooking the challenges.
The author is an advisor in Amity University