Focus on higher commissions adds to insurance mis-selling

The concern expressed by Finance Minister P Chidambaram earlier this week on the issue of mis-selling in the insurance industry has brought the issue of malpractices while selling policies to the forefront.

While on one hand, penalties have been imposed on insurance companies time and again by the Insurance Regulatory and Development Authority (IRDA) for issues including malpractices in policy issuances, lapse on the part of agents to sell policies with higher commissions has led to continuance of mis-selling.

Post the unit-linked products (Ulip) reforms where commissions of agents were capped, insurers have noticed that agents do not want to sell these products. “Due to the low nature of commissions, we have seen that there is a very low interest among distributors to sell these products and offer other products to consumers, since the incentives are low. This may often be considered by consumers as mis-selling,” said the chief executive of a life insurance firm.

Ulip-related complaints accounted for 11,714 out of the total 309,613 complaints in the life insurance industry, according to the Insurance Regulatory and Development Authority (IRDA) annual report for 2011-12. The report said maximum complaints in the life insurance sector were related to malpractices and accounted for 34,799 complaints out of 100,770 complaints in unfair business practices 2011-12. In the non-life sector, maximum complaints were policy related, accounting to 38,076 complaints out of 93,155 complaints in 2011-12.

“Among the various complaints filed with consumer forums, about 85 per cent of them are against insurance companies,” explained consumer activist Jehangir Gai. He added the number of cases owing to claim rejection and mis-selling have been on the rise, year-on-year.

Further, out of the total 3,09,613 complaints in the life insurance industry, about 32 per cent of them were under the category of unfair business practices. In 2010-11, too, the IRDA annual report showed that sales related issues accounted for the maximum number of complaints in the life insurance sector.

“While a number of measures have been taken, there are issues which need to be addressed, including concerns on persistency and mis-selling,” IRDA chairman J Hari Narayan had told Business Standard recently.

The finance minister had said the reason why insurance was stumbling in India was because of mis-selling of products and complex products. In an attempt to simplify product structures, IRDA is in the process of bringing out the final guidelines for design of traditional life insurance products. For unit-linked products in life insurance industry, the regulator has already put in place Ulip regulations.

Insurance industry players, however, have a different view. G V Nageswara Rao, MD & CEO, IDBI Federal Life Insurance, said every year about 50 million policies were being sold by the industry. “The customer can be fooled once, but not always. It is not correct to assume that the high volumes in the industry is due to mis-selling. Since the volumes are high, even a few instances can show an exaggerated figure, which is not an appropriate representation,” he said.

While he added that these figures should be seen in the right context, he said companies need to have procedures to curb mis-selling. The life insurer has put in place a mechanism wherein they have independent investigators to look into such complaints.

General insurers are of the view they are better placed in terms of mis-selling. K G Krishnamoorthy Rao, MD & CEO, Future Generali India Insurance, explained that except health insurance segment, there was no major issue of mis-selling as it is easy to detect these cases in the general insurance industry. “Health is a segment where there have been cases of certain coverages being promised and not offered at the time of a claim. But otherwise, we are better off,” he said.

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