MULTI LEVEL MARKETING IN INSURANCE – PAST, PRESENT & FUTURE

It is common knowledge that MLM works on the concept of time leverage. Though it is given various names like Network marketing, freelance marketing, chain marketing (money chain in a negative sense), the basic principle is that a happy consumer brings in more customers for which he is getting an incentive. The network plan or income schemes vary from company to company. The more reputed companies in MLM in India and abroad are, Amway, Modicare, Oriflamme, Tupperware, Quantum, RMP, Goodways, Placement Services etc. All these companies have web based information system where a member can monitor the growth of his down line memberships, incomes accrued etc. The visible part of the network is a distribution center (for product based MLM) and weekly meetings of members and prospective members to explain the business plan, demonstrate products, recognize the achievers etc. It works on the principle of multi level structure e.g. A work to be done by you in 100 days can be completed in one day if you have 100 people under you (in a chain) doing one days work. You earn a % of incentive for the work done by each of these 100 people.

The Insurance Regulatory and Development Authority have expressed its concern over the referral programme prevalent among insurers. Some private insurance company agents and multi-level marketing (MLM) companies are misusing the scheme. Though the concept was authorized by IRDA, it believes agents riding on the new concept are not following the procedures properly. The referral programme was a new concept started by private insurers some to facilitate sale of insurance policies by the existing agents, who in turn, reach out to prospective clients through an informal understanding with local networks. The informal sub-agent, in turn, gets a portion of the commission from the authorized agent. IRDA has come across cases where sub-agents have reportedly mis-sold the policies since they are not properly trained. IRDA is worried about such mis-selling of policies.

THE CONCEPT OF MLM MARKETING IN INSURANCE:

The most active Product in Network Marketing now a day is Insurance. The Most trusted Product for a Member as they need to pay to the Insurance companies only. Because of Many Fraud Company’s closures in the last few months / years, People are losing Faith in Network Marketing companies. In such scenario, Insurance is the only product on which any Member can rely on without any doubts.  MLM has proved as an easy to understand method by common people. This is also a Payment Gateway for Tie-ups. In insurance it helps in managing:

  • Policy numbers
  • Receipt details from insurance companies
  • Renewals
  • Free look up period for the policies
  • Cheque clearance notification
  • Many more other features that puts you in a very comfortable stage to run your company with a greater ease.
GREEN ENERGY-THE DRIVING FORCE:

Multi-level marketing is a business system where salespeople sell products and get other recruits to sell products. You earn for each product you sell and for each product your recruits sell. It can be thought of as a networking matrix, where the more recruits you get on board, the more income you make. It is possible to make money in a MLM system. The key is to get in at the right time and do well selling the product. Studies show that the majority does not make enough money to live off in such an environment, but the initiators does make good amount in a year. Getting in at the right time is important. In the early stages, the system has more possible people to recruit, while in the later stages it can be difficult recruit and sell products. The system is widely criticized for a number of reasons. It widely resembles a pyramid scheme where the bottom pays the top. It is only different in that there is a product involved. Once the system reaches a certain level, there will be a shortage of recruits in the market, which may lead to it failing. A 5×5 matrix (each recruit getting 5 more recruits) will fail around level 10. At this point the recruits towards the bottom will begin dropping out because they are losing money, which leads to a domino effect all the way up to the top. This is only a profitable venture if it is entered at the correct time. If you get in on a product early, you may have a chance to make some extra income. But if you are late, you will most certainly be losing what you put in. In most MLM systems, a large majority lose money. The product is important.

THE REGULATORY PROVISION:

According to The Insurance and Regulatory Development Authority, there were approx 7000 corporate agents in the country and more than 4000 out of 7000 did not applied for renewal of their licenses till 31 March 2011. IRDA cancelled the licenses and banned 4261 corporate agents who were selling life insurance and General Insurance without getting their licenses renewal from March 31, 2011. IRDA issued a list of such agents who are not authorized to sell the insurance policy. IRDA warned the Insurance companies not to transact with such agents and also suggested the public not to take any type of insurance policy from those agents. By doing so it has affected the business of all the Insurance companies dealing in Life and General Insurance including the big names like HDFC Bank, Standard Chartered Bank, Housing Development Finance Corporation and LIC because all these Insurance companies are related with these corporate agents at big level of their business. Multi-level marketing (MLM) companies like Team Life Care (TLC) Insurance (India) Pvt. Ltd, Pearl (PACL), Lakshya India, etc, have been selling insurance as a product. The insurance majors are turning a blind eye to this practice. Selling insurance on a commission payback to customers is illegal, according to the Insurance Regulatory and Development Authority (IRDA) Act. MLM Marketing is a clear-cut case of violation of the laws relates to schemes that distribute insurance policies on behalf of various private insurance companies. Any person desirous of marketing insurance polices has to pass an examination conducted by IRDA. Only corporate agents or brokers (registered with IRDA) are entitled for commissions. Companies actively involved in marketing insurance schemes include TLC Insurance (India) Pvt Ltd (TLC), RMP and Amway, among others. These details indicate the nature of harmless fraud and also the frequent testing of the frontiers of economic law by such companies in order to gauge the reaction of the agencies of the State. The lack of reaction by State institutions, or even tacit approval, is likely to gradually lead to calls to formalize these activities at a future date.

THE PYRAMID STRUCTURE:

All these companies form a pyramid structure wherein the insurance coordinator gets in new recruits to form a chain. The payments given out to these agents depend on the number of recruits joining the scheme. Companies such as TLC collect membership fee—in this case Rs 500 in addition to the cost of the product they market—like a Rs 5,000 insurance policy by Bajaj Allianz. It’s a clear-cut case of violation of the laws relating to schemes that distribute insurance policies on behalf of various private insurance companies.

Some, like TLC, have made it mandatory for candidates to clear the IRDA formalities before joining the company as an ‘insurance coordinator’. Ironically, the company does not follow the regulations of the IRDA Act. Other companies like DSR Insurance Services, claim to be registered with IRDA and also claim to be licensed agents of LIC. These companies do not work for consumer interest; in fact, they push policies that benefit them the most, earning point values according to the amount of the insurance they sell. DSR sells “Binary” and “Spill” income plans which work like a marketing chain.  These companies claim to have partnered with insurance companies like Bajaj Allianz, Reliance Insurance, ICICI Lombard and LIC. On their websites, they even claim to be members of FICCI and IRDA. MLM companies have been selling insurance products, in clear violation of the IRDA Act.

 

IS “MLM” AN AUTHORIZED DISTRIBUTION CHANNEL?

Jeevan Suraksha Medicare Services Ltd, an insurance broker agency based in Gujarat, is yet another company engaging in chain-marketing insurance products—an activity discouraged by insurance regulator and prohibited under the Insurance Act, 1938. Section (41) of the Insurance Act, 1938, clearly states that “a licensed agent, whether individual or corporate, can’t appoint a sub-agent and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating and is prohibited under the Act. Despite the law being in place, corporate and insurance brokers of various insurance companies are openly running such schemes. Countries like Sri Lanka, Australia, Nepal and China have already abolished all kinds of chain-marketing schemes. IFCO-Tokyo, ING Vysya Life Insurance and Shriram Life are some of the associate companies of Jeevan Suraksha. The company claims to have more than 17,000 agents working for it.  Their policy is: “The Company recruits insurance agents. After taking the agency license you can start selling general and life insurance policies. You don’t have to give any test. If you take our agency then you have to work for one month to accumulate 1,000 ‘Jeevan Value’ points. After that Jeevan Suraksha recruits you.” According to recent media reports, a public interest litigation (PIL) was also filed in the Allahabad High Court against IRDA alleging mis-selling of Unit-Linked Insurance Plans (ULIPs) and insurance companies which encouraged the network marketing model. To become an agent of Jeevan Suraksha, one has to buy a personal accident policy of Oriental Insurance Co Ltd by paying Rs 450 premium for a three-year cover. The sum assured is Rs 5 lakh. The budding associate (agent) has to sell 25 personal accident policies of Oriental Insurance in order to become a ‘Jeevan Associate’ for which he gets 1,000 Jeevan Value (JV) points. This is the first stage to qualify for becoming a Jeevan Associate agent. The associate gets 20% commission on 10,000 JV points (1JV point=Rs10) at the entry level. The second stage is ‘Jeevan Earth’ in which the agent gets 5% commission on 20,000 JV points and a Parker pen as a reward. The rewards for the successive stages are a mug set (Jeevan Moon), executive bag (Jeevan Venus), wrist watch (Jeevan Mars), laptop (Jeevan Pluto), Bajaj Pulsar bike (Jeevan Quasar), Maruti SX4 (Jeevan Star), Honda Civic (Jeevan Sun), to name just a few stages. If the associate reaches the last stage, i.e., ‘Jeevan Sun’ he can get a maximum of Rs 51,000 as pension per month, as long as the business keeps coming in. The company proclaims that the criteria for becoming a ‘Jeevan Associate’ is that an individual has to be 18 years of age, possess a PAN card, enjoy Indian citizenship and should be mentally sound. Jeevan Suraksha deals in life insurance, general insurance and mutual funds. Bajaj Allianz Family Assure II, Future Saral Anand, LIC Jeevan Saral, Met Growth Super, Nagrik Suraksha Policy and Mediclaim Floater 180/365 are some of the insurance policies on offer.

 

RBI FLESHED RED SIGNAL AT MLM COMPANIES:

The operations of shady multi-level marketing (MLM) companies — which operate what are popularly known as pyramid or ponzi schemes — have come under the regulatory scanner with shady MLM companies mushrooming across the country and duping investors. Many firms posing as MLM agencies for consumer goods and services have been actually mobilising large amounts of deposits from the public with promises of ridiculous returns of 120 per cent and repayment of principal within a year. In a circular, the Reserve Bank of India has alerted banks that in cases where accounts have already been opened in the names of the marketing agencies, retail traders and investment firms, the banks should undertake quick reviews. Wherever large number of cheque books has been issued to such firms, the relative decision may be reviewed. With many MLM companies recently using the banking technology to dupe investors, the RBI warned that “banks should be careful in opening accounts of the marketing/trading agencies etc. Especially, strict compliance with KYC (know your customer) and AML (anti-money laundering) guidelines issued by the RBI should be ensured in the matter.” The banking regulator also named seven MLM companies (Fine India Sales Pvt Ltd, Lakshya Levels Marketing, Eve Industries, Trident Advertising & Trade Links Pvt. Ltd, Super Life Link Distributors, Lue Brain Education Society and Manya Mantra Marketing). These firms and their agents had reportedly promised very high returns on deposits and lured common people to part with funds in the name of certain investment/deposit schemes.

 

PERSUING THE “MLM” BUSINESS:

Ones the member becomes part of the MLM network, as time and desire permits, he can try to expand his down-line network by making more and more members join the network. This is the point at which he has to make use of all his contacts and connections among friends, relatives, associated to impress them and invite them to join the network. This is similar to the method used  by insurance and other direct marketing companies to expand network inviting unemployed, A MLM member who progressively advanced through the network gets opportunities to  attend weekly meetings, share his success stories with other members, get rewards for  performance etc.

This also provides opportunities to improve their presentation skills, communication skills, motivation levels and inter personal skills. Many people realize their true potential and selling skills after joining a good MLM network. That way, it helps them to develop personally also. So the MLM members look at the business as income, fun and self development, besides satisfaction from showing the way or providing opportunities to fellow countrymen.  Networks with membership numbers in a few lakhs are providing an employment opportunity for unemployed youth and other sections of society. By mobilizing large amount of funds through Insurance sales, they indirectly help the economic progress of the country also. The early negativism in the society about Multinational MLM companies like Amway is gone now and they can play an increasing role by creating jobs and mobilizing long term funds. Irrespective of the business plan and earning pattern and other advantages, MLM concept is likely to be stretched to more and more products or concepts. With the recent changes in laws relating to contract employment, part-time employment etc, many enterprising youth embrace it as a source of second income.

 

“MLM” MARKETING IN INSURANCE:

Multi Level Marketing (MLM) is embracing more and more arenas today. Insurance business is just one among them. Selling Insurance policies, traditionally, is considered as a de-motivating and dragging job, not until you discover the power of MLM to boost policy sales. With the competition heating up in the Insurance sector, companies are looking for innovative methods to spread the message and garner maximum business in shorter time. Many local MLM companies having quite large spread in the market are joining hands with leading insurance brands to promote their products along with an assortment of their own products. Insurance sector makes available long term debt for the economic development of the country. At the same time, the MLM route provides employment opportunities to lakhs of people and enhances their social status.

The MLM members also get tremendous opportunity to develop themselves personally. This multiple role of MLM companies can be looked at as a social contribution and these companies or cooperatives are emerging as a development oriented social movement. Successful Personal selling based on referrals is the key to ensure regular expansion of customer base and building long term customer relations. A country like India offers immense potential to build well run marketing networks to promote consumer goods and appliances. Conventional marketing may become slow or stagnated over a period of time. Multi level marketing may be the turnaround tool in such situations. Some MLM companies have great products and potential but a part times sales force can mess things up, especially with these types of products.

 

MULTI LEVEL MARKETING SCAMS:

MLM marketing is typically a scheme with a pretty product used to disguise the trickery. In reality, it’s little more than a scam.  The attraction is the money they dangle in front of you not the quality of the product. They tempt you with all the things you’ll be able to do once that money starts pouring in. Travel the world. Buy that second time. Dream big. But any business that is founded on the profits and not the competitive edge of the product is a mirage. MLM products are typically sold only through the MLM distribution channels, and this makes no sense. If the product is good enough to compete in the market, it would be sold through more conventional channels. If it’s not sold through conventional distribution channels, then it means the product isn’t really what’s being sold – rather, it’s the process that’s being marketed. And that process is just a vague scheme. The foundation of MLM is to get other people to buy into the system. They buy in with the dream of having 10 people buy in beneath them and having that process continue ad infinitum. That is how they plan to build wealth – not on the strength of the product itself. And that is the core problem. Recently the founder of FUND AMERICA – a huge MLM system in the 90s – was arrested. 90% of the profits he made was from the distribution channels and not from product sales.

 

THINK BEFORE YOU LEAP:

Non-MLM real-world businesses that offer products of interest to friends, family, etc., such as insurance agents and small retail shop owners, seem to be more circumspect in dealing with personal relationships in all but a few rare (and grievous) cases. But the MLMer is recognizable by duplicity of friendship overtures, overbearing glad-handing, full-time prospecting, outrageous initial deception, and social callousness. This is no accident, but rather sheer desperation.

And so the MLM relationship “bull” tramples through the relationship “china closet,” blindly ruining fragile and valuable things. Some never pull out of this, figuring the coldness they experience in their emotional lives is due to some other cause than their MLM participation. So many of the products sold through MLM are the products which couldn’t be sold in any other way. Don’t be part of it. Before you get involved with a multi level marketing program ask yourself a few questions:

 

  1. Do I know what I’m selling?
  2. Do I want to get my friends involved in something they may not understand?
  3. Do I want to sell something that can only be sold word of mouth rather than based on the product’s strengths?
  4. Do I want to make money based on selling a system rather than a product that delivers benefits?

 

With MLMs, the situation is much worse. Nobody is home. Not only is there no one assigned to make the decision of how much is enough, the MLM is set up by design to blindly go past the saturation point and keep on going. It will grow till it collapses under its own weight, without even a bureaucrat noticing. MLM is like a train with no brakes and no engineer headed full-throttle towards a terminal.

PROBLEMS IN “MLM” MARKETING:

MLM can no longer claim to be new and, thus, exempt from the normal rules of the market and the way goods and services are sold. They have been tried and, for the most part, have failed. Some have been miserably failures in spite of offering excellent products. Marketing innovations are not rare in the modern world, as evidenced by the success of Wal-Mart, which found a more efficient and profitable way to distribute goods and services than the status quo, providing lasting value to stockholders, employees, distributors, and consumers. But this is not the case with any MLM to date, and after 25 years of failed attempts, it is time to point out the reasons why. First, let us analyze the “driving mechanism” of MLMs. Get detail how they are intrinsically unstable, guaranteed by design to over saturate the market with no one noticing. Just look at why MLMs can never equalize into profitability the way companies in the real world can, so that the result will be that the organization as a whole cannot, even in theory, be profitable. When this inevitable destiny occurs, the only money to be made is not from the product or service but from the losses of people lower down in the organization.

Thus the MLM organization becomes exploitative, and many high-level MLM promoters have been shut down, the “executives” incarcerated, for selling the fraud of impossible success to others. Other, larger MLMs have survived by hiring large batteries of attorneys to ward off lot of prosecutors, even bragging about the funds they have in reserve for this purpose. The unfortunate “distributor” at the bottom is the loser, and once this becomes apparent beyond all the slick videotapes and motivational pep-talks, good people start to get a bad taste in their mouths about the whole situation. So, yes, money can be made with MLM. The question is whether the money being made is legitimate or “made” via a sophisticated con scheme. And if MLM is “doomed by design” to fail, then the answer is, unfortunately, the latter. But how exactly does this happen, and must it always?

 

DOOMED BY DESIGN:

MLMs work by geometric expansion, where you get ten to sponsor ten to sponsor ten, and so on. This is usually shown as an expanding matrix with corresponding kick-backs at various levels. The problem here is one of common sense. At a mere three levels deep this would be 1,000 people. There goes the neighborhood! At six levels deep, that would be 1,000,000 people believing they can make money selling. But to whom? There goes the city! And the MLM is just getting its steam going. Think of all the meetings! Think of all the “dreams” being sold! Think of the false hopes being generated. Think of the money being lost. The first question is this: Is any company choosing this marketing strategy destined to fail, to degenerate into an exploitative venture, regardless of how good the product is? To see this clearly just go through an, otherwise, obvious and elementary analysis of how any business must be careful not to overhire, overextend, or oversupply a market. Any business must carefully consider supply and demand. All products and services have partial market penetration. For example, only so many people wish to use a discount broker, as evidenced by the very successful but only partial market penetration of Charles Schwab. Not everyone wishes to join a particular discount club, or buy gold, or drink filtered water, or wear a particular style of shoe, or use any product or service. No one in the real world of business would seriously consider the thin arguments of the MLMers when they flippantly mention the infinite market need for their product or services. For most MLMs, the product is really a mere diversion from the real profit-making dynamic. The product or service may well be good, and it might oversaturate at some point, but let’s get serious. The product is not the incentive to join an MLM. Otherwise people might have shown an interest in selling this particular product or service before in the real world. The product is the excuse to attempt to legitimate the real money-making engine. It’s “the cover.”Intuitively, we all know what is really going on with MLMs.

 

MLMs vs. THE REAL WORLD:

The basic question that needs to be asked is this: If this product or service is so great, then why isn’t it being sold through the customary marketing system that has served human society for thousands of years? Why does it need to resort to a “special marketing” scheme like an MLM? Why does everyone need to be so inexperienced at marketing this! Is the product just a thin cover for what is really a pyramid scheme of exploiting others? MLMs are intrinsically unstable. For any company that chooses an MLM approach, it’s pop or drop. Again, the simple fact is that even the most successful products will have partial market penetration. The same is true for services. Demand and “market share” are finite, and to overestimate either is catastrophic. So why are MLM promoters obscuring this? Who is in control of the supply “knob,” carefully and skillfully managing the size of the distribution channels, number of salespeople, inventory, etc., to insure the success of all involved in the business? The truth is chilling: nobody. Imagine trying to write a computer model of how MLMs work, and you will see this point most vividly. An MLM could never work, even in theory. Think about it.”You see, if you can convince ten people that everyone needs this product or service, even though they aren’t buying similar products available in the market, and they can convince ten people, and so on, that’s how you make the real money. And as long as you sell to a few people along the way, it is all legal.” Maybe…but the way to make money in all this is clearly not by only selling product, otherwise you might have shown an interest in it before, through conventional market opportunities. No, the “hook” is selling others on selling others on “the dream.” The claim that an MLM is merely a “common man” implementation of a normal real-world distribution channel becomes even more absurd in this case. Imagine buying a product or service in the real world and having to pay overrides and royalties to five or ten unneeded and uninvolved “distributor” layers. Would this be efficient? What value do these layers of “distributors” provide to the consumer? Is this rational? Would such a company exist long in a competitive environment?

When it comes to selling product, MLM sales reps are probably no more aggressive or obnoxious than ordinary salespeople. Since most are not salespeople by nature, and it is characteristic that MLMs attract few people with any experience selling this particular product or service, they usually sell through pre-fab “parties” or home “demos.” Thus, sales pressure is exerted by situation, if at all. It should be noted that when selling product, the only distinction from a real-world business is the possibility for deception due to the “looseness” of the MLM and the incentive to exaggerate claims without any accountability. Other than this, selling product in an MLM is fairly similar to selling any product in the real world. But when it comes to getting you “signed up” as a “distributor,” the MLMers get pushy and deceptive beyond the boundaries of polite social norms. The MLM is defined by its rewarding people to recruit others in multiple levels. Many have left high-paying jobs to “pursue their dreams” in an MLM. Though,  having been conned so dramatically, they do not easily admit defeat. It seems easier to cling to the bad dream in an increasing cycle of desperation to make the MLM work against all odds. “Losers” at the bottom congregate into support groups, perhaps spinning-off another MLM where they can be “boss.”There is an undeniable camaraderie among MLMers. But for everyone else, “there goes the neighborhood.” It is saddening to see people being encouraged against all instinct and common sense to chase after an illusory “pot of gold,” but what can be done? Would a rational person, abreast of the facts, go to work selling any product or service if he or she knew that there was an open agenda to overhire sales reps for the same products in the prospective territory? MLMs grow by exploiting people’s relationships. If you are going to be in an MLM, you swallow hard and accept this as part of “building your business.” This is “networking.” But to those not “in” the MLM, it seems as if friendship is merely a pretext for phoniness, friendliness is suspected as prospecting, and so on. There is no middle ground here, try as you might. While this is the most difficult point to make, it is perhaps the most important. Anyone who has any experience with an MLM has strong feelings, either for or against, and this is the problem. Polarization runs deep.

The operations of shady multi-level marketing (MLM) companies— which operate what are popularly known as pyramid or ponzi schemes —have come under the regulatory scanner with shady MLM companies mushrooming across the country and duping investors. Many firms posing as MLM agencies for consumer goods and services have been actually mobilizing large amounts of deposits from the public with promises of ridiculous returns of 120 per cent and repayment of principal within a year. In a circular, the Reserve Bank of India has alerted banks that in cases where accounts have already been opened in the names of the marketing agencies, retail traders and investment firms, the banks should undertake quick reviews. Wherever large number of cheque books has been issued to such firms, the relative decision may be reviewed. With many MLM companies recently using the banking technology to dupe investors, the RBI has warned that “banks should be careful in opening accounts of the marketing/trading agencies etc. Especially, strict compliance with KYC (know your customer) and AML (anti-money laundering) guidelines issued by the RBI should be ensured in the matter. The banking regulator also named seven MLM companies (Fine India Sales Pvt Ltd, Lakshya Levels Marketing, Eve Industries, Trident Advertising & Trade Links Pvt. Ltd, Super Life Link Distributors, Lue Brain Education Society and Manya Mantra Marketing). These firms and their agents had reportedly promised very high returns on deposits and lured common people to part with funds in the name of certain investment/deposit schemes. The government is close to finalizing new rules for multi-level marketing firms and is working on an early warning system to prevent corporate frauds. The Serious Fraud Investigation Office (SFIO) — under the Corporate Affairs Ministry — is working on an early warning system that would help in preventing corporate frauds. The SFIO has already set up a computer lab for this. This is part of the ministry’s vision for having enlightened regulations. The analysis wing of SFIO has come out with many reports and the ministry is acting upon that information. The new rules for multi-level marketing companies have almost been finalized.


Author : JAGENDRA KUMAR, Insurance Counselor