The Indian insurance industry is suffering a lot due to mis-selling of insurance products. Due to short term gain some scrupulous advisers, Brokers, lead generating agencies, websites are mis-selling life insurance policies with a bang.  In an industry that is growing its wing slowly to tap huge uncovered population, this is perhaps the last thing the industry would want.

I would like to share a recent telephone call received by personally by me. A person called me and told that he was calling from the Ministry of Finance, Investment department, New Delhi. They have opened a helpline to help the customers who have been cheated and missold insurance policy. The caller identified himself as Arpit Malhotra from Delhi.  He asked me if I have invested in any insurance plan and was cheated.  To test their methodology I told the name of a particular insurance company that it has cheated me with Rs.4 lakhs.

He then told that he will open a file and forward my complaint to a senior fund manager in Ministry of Finance who will help me out in getting the refund. He told me to specially request the Bada Sahab (person who will call) to look into the matter and arrange for refund. After half an hour I received a call from a Mr Vineet Shah, senior fund manager (Bada Sahab) from Ministry of Finance. He then asked me to give all the details of the amount I have lost in the insurance company. After putting me on hold for a few minutes he calculated and informed that I would be getting a refund of Rs.496190/- within 90 days of lodging the complaint to the ministry of finance.

I got curious with this selling methodology and kept on the conversation with him in order to get the whole truth out. After convincing me for around 40 min he told that he has taken a request for the refund of the premium and I will get a cheque from SBI within 90 days. I was just waiting for the time when he would ask for purchasing an insurance policy.

He continued and told that to complete the formalities I need to show that I have a policy from a government approved company. He told that in the meeting in the year 1984 two private insurance companies has been approved as a government company.

I must show that I am having policy from these two insurance companies. He then told me to take a policy for a premium of Rs. 27,000 from a life insurance company based at Pune.  He advised me that once I receive my cheque for Rs.496190 I should deposit the amount in post office as I should not trust any insurance company. A perfect example to convince me that he is my wellwisher.

He then offered me to send a representative to collect the cheque which I readily agreed. A representative from that insurance company visited me within one and half hours to collect a cheque. When I narrated the story to the representative he showed his ignorance about the methodology and washed his hand from the fiasco.

The representative then told me that this lead was generated from a leading insurance broker at New Delhi.  I got all the details of the insurance broker based at Delhi.  The person calling was so convincing that most of the persons would have fallen in his trap and taken an insurance policy to get the refund of the premium lost.

I have forwarded the complaint to ministry of finance, insurance company, IRDA, life insurance Council. Let’s see what action is taken against them. But the problem is that the particular insurance company will say that they have stopped accepting business from that particular insurance broker. But what about punishing that broker? The Internet is also full of complaints against that broker. IRDA should take some concrete steps to cancel the licence of that broker after proper investigation since I have given all the contact numbers of the person and the broker who had called me.

I can just think about the plight of a common man who receives a call like this and falls into a further trap. Insurance companies must take this seriously and initiate action against the culprits.  Similarly there is unending list of spurious websites,telecallers, chain marketing companies who are involved in Insurance Fraud.

Most of the time the insurance companies hold that they are not responsible for mis-selling. It is the agent or the intermediary who is the culprit.  But the opinions and feedbacks received from the policyholders doesn’t suggest that. In many cases the sales manager who is the employee of the company is also directly involved in mis-selling the policy.

In Insurance industry we have the concept of free look period of 15 days.  In many cases we see that where mis-selling has taken place the policy bond reaches the customer after the expiry of 15 days so that the policyholder may not apply for a refund of insurance premium. How does this happen? Definitely some employee of the insurance company is also involved in deliberately delaying the delivery of policy before 15 days.

A recent IRDA report suggests that mis-selling which was earlier predominant in ULIP policies has now shifted to conventional policies. IRDA has introduced Integrated Grievance Management System in which the policyholders can submit online complaint.

The IRDA statistics suggests that the number of grievance has increased and a lot of policyholders are penning their grievance online in the portal.  An excerpt from the IRDA report will help to identify the scenario of grievance management system of IRDA. According to the data from IGMS during the financial year 2011-12 the total number of complaints received for the life insurance industry stood at 309613 out of which 308331 grievances were resolved during the year.

Out of this 257313 complaints pertained to private life insurers and the rest was for LIC. Here is a chart giving classification of the type of complaint received by the regulator.

Classification of Life Complaints

If we see the above chart most of the complaint 100770 i.e. 32% pertained to unfair business practices, 27% complaint were for delay in proposal processing and 20% complaints were for delaying policy servicing.

Further analysis of the following table will show the breakup of areas where the complaints for unfair business practices has arisen.

Most of these complaints show that the policy was sold to the customer by false commitment and malpractices by the seller.  This is only the actual figure of complaints received by IRDA at IGMS. What about the complaints that were not made to IGMS or which are pending with insurance companies or where the policyholders are not capable enough to lodge an online complaint.

I believe the number of complaints of policyholders who have not registered at IGMS will be huge since a large number of populations are not computer savvy. Secondly many would not be having the knowledge of submitting the complaint in the online form to IGMS. Also the first point of contact is the insurance company. Before registering a complaint to IGMS the policyholders must first approach the insurance company directly and in case of non-resolution of grievances the complaint may be made online to IGMS.

Roughly the number of complaint which is not reported from remote areas would be at least 10-20 lakhs per year. In this we have to include cases where the customers has already been cheated and they will get to know of this after few years when they will start getting the insurance benefit as guaranteed.

Now just think of the situation of people residing in rural areas.  They are not literate and are always looking out for some options where they can increase their return from income due to ever increasing inflation. Now once the insurance advisor approaches a lay man and paints a rosy picture of the returns from investment, the customer falls in trap and buys the insurance from him.

Now since the insurance is a long-term contract of minimum say five years the policyholder would know about mis-selling only at a later date. Till then the advisor who has sold the policy will run away after making a killing.

The average shelf life of an advisor or a sales manager in private insurance company is very low. In the current scenario on an average insurance sales manager works for 1-2 years and then switches over the job. The insurance manager thinks that anyhow he needs to generate policy by any means during this period.

We’re talking about persistency of insurance policies but what about the persistency of insurance managers or sales managers. Since they do not have a long-term commitment towards the company they are not bothered about right selling.

They just want to fulfil their quota of business by selling the policy and look for greener pastures. And when the pressure in the company increases he just switches over the job. We have 26 life insurance companies in India and if he switches job every year he can work with different companies for next 26 years.

As we know there is a real dearth of salesperson in the life insurance industry due to huge pressure targets. The HR of the life insurance companies has no option but to recruit sales managers who have worked in other life insurance companies.

Generally HR managers do not have any means to verify the loyalty of the new manager. It is obvious that the sales manager or advisor who has fooled several people must be very good at talking and at convincing people. So they don’t have any problem in getting the job in other insurance companies.

I am briefly identifying the areas due to which mis-selling takes place:-

  1. Ignorance of policyholders about the insurance plans and technical jargons of insurance business.
  2. Heavy selling pressure on the insurance advisors/sales managers from the management.
  3. Make a quick buck in form of insurance commissions
  4. Lack of strict vigil by the insurance companies since they are more interested in getting the business anyhow.
  5. Lack of Employee loyalty towards the insurance company
  6. Awareness of consumer limited in selective urban areas in 5 star hotels
  7. Mushrooming of chain marketing system which is only interested in earning
  8. No provision of any punishment to guilty persons who are caught in mis-selling
  9. Non existence of any Fraud database in companies to identify culprits.
  10. Entry of Corporate Agents who only take insurance as selling any commercial product for gain
  11. Unqualified Insurance Persons soliciting insurance business
  12. Greed of customers who sign up for policies for getting 30-50% return within a year or so.
  13. Existence of huge number of uninsured market which is ready for getting the policy missold.


Misselling if not stopped can be reduced considerably by the joint efforts of IRDA, Insurance Companies, Intermediaries, and Consumer Organisations.

I would like to suggest some effective measures for stopping misspelling:-

Awareness: Make the consumer aware at the ground level. It was believed that after opening of insurance sector the insurance companies would make the consumer aware at ground level. Though sale of policies has increased but the awareness is still a far cry. By organising some seminars at 5 stars hotels will not make the rural customers aware of insurance.

Companies and IRDA must reach at ground level. Organise ground level meeting involving panchayats, local administration, clubs, NGO’s to spread awareness about insurance. Give them case studies of misspelling so that they may be aware.

Fraud Database: IRDA should immediately start a fraud database and ask insurance companies to include names of sales person who are found in misspelling. The Ombudsman where cases of misspelling are found should ask insurance companies to include the name of agent in fraud database while passing the order.

The photograph and location of person should be included just like the advertisement by Banks in case of loan defaulters.  IRDA should also put the names where they find confirmed evidence. Policyholders should be asked to submit details of fraudsters online which can be published after verification.

Criminal Penalty: In insurance sector we have a very unique way of dealing the fraudsters. Once a person is found mis-selling he’s just advised not to repeat the same again. Or in the worst case is thrown out of the company. This is the prime reason why the mis-selling is flourishing. He just switches over to another company and restarts misspelling.

The moment a person is identified mis-selling policy criminal action should be taken against him and must not be let off. Suitable police action should be taken against him. In India since the law of punishing culprits involved in mis-selling are non-existent, the misellers take the customer for a ride. Ministry of Finance should include suitable provisions in the IRDA act for penal provisions and in case if he let off charge the insurance company official responsible.

Ban Chain Marketing System: Again officially chain marketing system is not permissible in insurance industry but still most of the insurance companies are utilising this channel to get bulk business.  In India we follow a rule everything is fair in love and war till anyone is caught. So everyone utilises this channel unless some serious fraud is found and IRDA bans it after few years. By the time damage is already done.

Still chain marketing business is being done on a very large scale in insurance and companies are getting good business. Everyone is busy finding new ways and rules to break the law. In India the politicians does not find themselves guilty till convicted by Court.  They know very well that it will take 10-15 years to get a decision and meanwhile they will continue siphoning and by the time evidence will die or matter will get off from public attention.

Actual training of advisors: The concept of training was launched with much fanfare in the insurance industry in the year 2000. Over the year the system of IRDA training to advisors has been diluted and now a big chunk of training is carried on paper. When the training was started the accredited insurance training institutes used to charge Rs.6000 per candidate for 100 hours training.

Now for 50 hours training the rate is Rs. 250-1000. Now you can imagine what training can be provided for one week including study material, refreshments at this cost. Training has become a farce and either IRDA should revamp it or stop this Mock training display. The persons who have business in hand put a previous condition that they will not attend the compulsory training. The insurance companies have no option but to arrange training anyhow.

The existence of large number of UN qualified salespersons adds to the woes. Many employees are coming from FMCG companies who were involved in selling of soaps, hair oil and general products. Now when they enter into this insurance sector they treat selling of insurance policy just like any other FMCG product.

More strict steps against insurers:  Off late IRDA has been levying penalties on the insurers for non-compliance of IRDA regulations or not complying the stated guidelines.

The amount of penalties has been gradually increasing in different insurance companies. What is the purpose of levying these penalties? What effect the insurance companies will have by levying this penalty.  These are just peanuts and will be taken in usual course of business.

The penalties must be stricter and must create fear in the mind of employees and top management.  They can also publish news of this penalty in newspaper. The Insurers will think twice for the sake of their reputation.

Chit Fund Companies:  Just to take an example in Bengal chit fund companies have mushroomed like anything. They are doing brisk insurance business.  One recent case came to my knowledge.

A person was approached by an insurance advisor who was not licensed to sell insurance policy. He gave him the details of the policy but the papers signed for insurance was not for insurance policy, it was for monthly instalment for purchasing a property.

Shocking isn’t it? On query the customers are told that since officially they cannot commit such high return so they are giving under this cover. IRDA should ban chit fund companies from selling insurance products in this manner.

Long term damage: This misselling is causing long term damage to the industry. Since in India the uncovered market is huge the misselling will continue as the advisors will catch hold of new customers anyhow.

The Life Insurers should seriously think about it as if this trend continues the people would no more trust insurance as an effective protection tool and shy away from this.  Though in short term insurance companies may sell the policy but in long term they are killing the huge prospective insurance market.

Insurance Commission: Since the maximum commission is paid in first year in business this instigates advisors to anyhow sell insurance and get quick buck. This should be stopped.

The commission should be more staggered and paid when policy is continuing. In cases where fraud/misselling are proved steps should be taken to recover the commission back from the insurance advisor by adjusting from other commission due to him.

Employees Loyalty: The HR department of Insurance Companies should be more vigilant while recruitment. They should try to recruit employees who have a long term commitment who has the vision for growth and developments for the company.

Procurement of business anyhow is not very huge task but procuring quality business is difficult.  They should be given induction training and informed about the values and long term career growth in the company. If the employees are loyal misselling will be reduced to great extent.

Undue Pressure on Sales force: We have surveyed large number of employees and advisors for the reason of misselling. Most of them are of the opinion that undue pressure from management forces them to any how sell the policy to save their job or agency.

The Insurance Company management will have to draw a line when to stop forcing the employees for business and differentiate the quality of business.  If the insurance company will insist on quality business misselling will reduce to a great extent. The philosophy of management has a great impact on misselling.

Verification of new proposal: I have seen that any new proposal brought by advisor is rushed for logging into the system to fulfil the target. This should be stopped. Whenever an advisor brings a new business it should be cross verified by a specialised team of underwriters who should call the customer and verify all the details.

If all the details and commitment made by the advisor is verified at the initial stage itself lot of misselling will reduce. It should be done before clearance of the cheque from proposer.

Maintain Persistency: Insurance Companies should have an internal system of verifying persistency of policies. If they find that in any case persistency is reducing they should immediately ban the advisor and verify all the business logged in by him.

FREE Look Period: IRDA has a system of Free Look Period of 30 days for returning a policy if not liked by the customer. This period should be increased to 45 days. It will also reduce chances of fraud where the policy document is delayed deliberately or the advisor accepts the delivery on behalf of customer.

Education in Private Sector: Gaining insurance knowledge and awareness in private insurance companies is abysmally low. Most of the people are more concerned in selling the insurance product rather than reading books, magazines.

They regard it as a waste of time. This is a very bad precedent and top management should encourage employees to inculcate reading habit and invest in educational materials.

IRDA more approachable: IRDA is having its head office at Hyderabad. Since insurance business is being conducted on a very large scale all over India I think IRDA should open regional offices in at least 4 major metros so that people from those regions can approach them and forward complaint and suggestions.

IRDA should also think to open one man kiosk/office in all major metros so that people can approach them and it can act as Customer Information Centres. IRDA should tieup with consumer bodies/NGO’s and ask them to act as customer support centres.  Compared to other regulators like RBI, SEBI the number of complaints and misselling is very high in insurance sector. These kiosks can help the consumers to file complaint online.

Overall efforts must be taken by all the stakeholders including the insurance companies, IRDA, Councils to prevent the instances of misselling and take some concrete measures to stop this menace from ruining the industry.

By: Dr.Rakesh Agarwal


Associate Editor, The Insurance Times

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