MIS-SELLING CONTINUES TO BE RAMPANT IN INDIAN INSURANCE SECTOR
The insurance business is affected by the churning of policies, which means a customer is forced by the agent or the sales personnel to surrender his/her existing policy to take a new policy, which benefits the agent or sales personnel but negatively impacts the customer. There have been numerous instances of customers being mis-sold policies which do not address their financial needs. The reason why insurance is stumbling in India is because of mis-selling of products and complex products. If you want to sell insurance to India, you must sell simple products and must make it absolutely clear to agents and other officers that they should not mis-sell. The Insurance Regulatory & Development Authority of India (IRDAI) has cracked down on mis-selling of insurance. Mis-selling in common parlance refers to unfair or fraudulent practices adopted at the time of soliciting and selling insurance and generally includes selling policies which have not been sought by the customer or which are different from what the customer wanted or was promised or where the product offered for sale is not suitable to the needs of the customer. Mis-selling by banks is a big problem. An online survey conducted by economictimes.com in November 2015 showed that three out of five customers were mis-sold investment products by banks. More than 36% respondents listed this as one of the major pain points in their dealing with their bank. Newbie investors and those with deeper pockets were most at risk. It’s not uncommon for bank staff to peek into the customer accounts and zero in on those with little knowledge or fat balances. There is enough anecdotal evidence to suggest life insurance is often mis-sold. In fact, the industry now accepts this and the sector regulator has instituted reforms to control the menace. The efforts have certainly improved sales practices but not completely plugged the hole.
There have also been cases of imposters calling up on behalf of the IRDAI and offering to help policyholders exit a life insurance policy and invest the money in better investment products. IRDAI does not call individual customers offering to help them exit plans. Mis-selling of insurance products and frequent changes in regulations may impact the valuation of insurance companies in India. The valuation of insurance companies has become a focus since Act has allowed foreign insurers to raise their stake in Indian ones to 49% from 26%. Curbing mis-selling is critical as it can hurt not only the reputation of the insurance industry, but also valuations of insurance companies. Owing to the trust reposed by customers in their banks, they buy insurance inside the bank branch. Allowing mis-selling inside the branch, therefore, smacks of negligence. It is not because of insurance they visit the bank branch, but because of their banking needs. While it is difficult to quantify the impact of mis-selling on an insurance company’s valuation, it does get affected adversely. High lapsation rate, which could stem partly from mis-selling, can be a drag on insurers’ valuations. To try and contain mis-selling and churning, the IRDAI has been on overdrive, issuing one regulation one after the other. However, while this addresses the issue of mis-selling to a limited extent, it has also created a new issue — that of frequently changing regulations. This has resulted in insurance companies being uncertain about the regulatory environment and curbing products on offer to the customers. Today, a lot of mis-selling happens due to topline (revenue) pressures on companies. Just to meet the topline pressure, managements of several insurance companies have adequate tolerance for mis-selling. Companies need to institutionalize that unless quality sales are brought to the table they won’t be accepted. Mis-selling of policies to people, mostly uneducated and poor, is rampant in the insurance sector.
WHY MIS-SELLING IS RAMPANT?
Mis-selling continues to be rampant. Due to large-scale surrenders of equity market-oriented schemes under ULIPs, mis-sold to customers during previous years, domestic institutional investors (DIIs) were forced to slash their equity holdings in domestic-listed firms in recent years. Therefore mis selling in insurance could be described as selling a product/service to a customer in a manner which is detrimental to his/her interest. Some of the common examples of mis-selling are:
References:
- Selling annual premium life insurance plans as single premium plan
- Premiums payable under the policy are beyond the financial capacity of the proposer/disproportionate to the actual sources of income
- Sale of insurance plans which are unsuitable based on the profile requirements of the customer.
- Sale of insurance policies without explaining the product features and without providing accurate and adequate information about the plan offered for sale.
- Sales of insurance plans by indulging in forgery, tampering of proposal or related papers
- Sale of insurance policies in the name of fixed deposits, term deposits, mutual
- Fund schemes, shares etc. Sale of insurance policies by using coercive
- Techniques such as imposing a precondition to obtain insurance cover from particular insurer for sanction of housing loan or any other benefit in respect of principal business carried out by corporate agents, banks/FI’s, either formally or informally.
- Sale of insurance policies by making fictitious offers such as huge bonus on poorly performing policies, sanction of a loan, opening ATM, putting up a telecom tower etc.
- Sale of insurance policies by resorting to spurious calling in the name of officials of IRDAI, RBI, SEBI, Insurers and other government agencies such as Ministry of Finance, Income Tax Department etc. The above list is only an illustrative – and not an exhaustive one.
- Product differs from what was requested or disclosed.
- Term (Period) of the policy is different/ altered without consent
- Mode of premium payment differs from requested or disclosed
- Annuity/Commutation/Cash Option / Rider/other Options not included as requested
- Proposed Insurance not in the interest of proposer
- Intermediary did not provide material information concerning proposed cover
- Single premium Policy issued as Annual premium policy
- Tampering, Corrections, forgery of proposal or related papers
- Credit/Debit card debited without consent of Consumer
- Premium paying period projected is different from actual
- Surrender value projected is different from Actual
- Free-look refund not paid
- Spurious calls or Hoax calls
- Advice concerning Exclusions/ limitations of cover not communicated
- Illegitimate inducements offered
- Misappropriation of premiums & Malpractices or unfair business practices
- IRDA (Protection of Policyholders’ Interests) Regulations, 2002
- The IRDAI (Insurance Advertisements and Disclosure) Regulations, 2000
- IRDAI (Appointment of Insurance Agents) Regulations, 2016
- IRDAI (Registration of Corporate Agents) Regulations, 2015
- IRDA (Insurance brokers) Regulations, 2013
- IRDA (Web Aggregators) Regulations, 2013
- IRDAI (Registration of Insurance Marketing Firm) Regulations, 2015
- Guidelines on Distance Marketing of Insurance Products, 2011
- IRDA (Non-Linked Insurance Products) Regulations, 2013
- IRDA (Linked Insurance Products)Regulations, 2013
- Grievance Redressal Guidelines for Insurance Sector 2010
- Corporate Governance Guidelines – Policyholder Protection Committee
References:
- IRDA Annual Report 2015-16 ( Data contents)
- http://economictimes.indiatimes.com/wealth/personal-finance-news/banks-will-now-be-penalised-for-mis-selling-insurance/articleshow/53782522.cms
- http://economictimes.indiatimes.com/wealth/personal-finance-news/mis-selling-may-impact-insurance-valuation-
- http://www.thehindubusinessline.com/opinion/consumers-are-taken-in-by-insurance
- IRDA Consumer Affairs Booklet
- Newspapers & Journals
About the Author
JAGENDRA KUMAR Ex. CEO, Pearl Insurance Brokers 71/143, “Ramashram” Paramhans Marg, Mansarovar, JAIPUR-302020
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