Why is Insurance Mis-Sold in India ?

“Come on! If you are a really good friend of mine, you ought to buy a life insurance policy from me”.

Sounds Familiar? How many times we keep hearing this argument from a close friend (?) or a relative to buy an insurance policy from him. Ever imagined how much this approach has contributed to the mis-selling of insurance in our country? You will be surprised to know that India is both uninsured and under-insured largely because of mis-selling.

Uninsured , because till date less than 25% of the population of the country has life insurance.

Under-insured, because the average life risk cover of the insured population still remains below Rs. 1.5 Lakhs which is highly inadequate for the family, if there were an unfortunate death of the earning member.

So what can be the prime reason for the mis-selling of insurance in our country ? Lets try and find out:

1. Lack of awareness and knowledge about insurance

Its not difficult to find a huge chunk of population which is very “Optimistic” and still thinks that insurance is an unnecessary expense.

Then there are others who buy insurance just to “Save Tax” ( I really wonder if tomorrow the government allows a tax deduction for throwing money into the river, these people might even consider doing that).

Then there is a third category of people who want to get insured and earn returns on the premium paid.

In all the above cases, the very basic principle of life insurance seems lost. I am not suggesting to be pessimistic, but try imagining only for a couple of minutes, who will shoulder the financial liability of the family if the earning member is not there. So, insurance is a must. And buy insurance with the view of only life risk cover. Trying to mix n match investments with it, ensures your planning to go for a toss.

2. Short term views by the agents fraternity

Now that IRDA remains firms on its stand to pay heavy upfront commissions to the insurance agents, this short term view by the insurance agents might stay for some time. Lets take an example of a typical insurance selling happening:

Mr. Raghav (imaginary character) is an insurance agent who visits Mr. Abhijeet (imaginary character) who is a software professional. Now, Raghav convinces Abhijeet to take life insurance from the point of view of “Tax Saving” and also some investments. Raghav is finally able to sell a traditional endowment type of a plan and bag a commission of 35% for the first year (out of which he has also passed back 20% to Abhijeet). Abhijeet is also happy for the time being, as he has saved tax, insured himself and also got some part of the premium back. So in his calculations, he has got the best deal.

3 years later, Raghav comes back to Abhijeet, telling him that there is a new plan launched in the market which is much better than the plan he had bought earlier. The new plan will give him much better returns (Readers have guessed it right. Its a ULIP that Raghav is now talking about). He recommends that Abhijeet surrenders the old plan and gets into the new one.

Now, the story is, on surrendering the old plan, Abhijeet incurs heavy charges and gets less than 70% of what he had invested (forget about getting any returns on investments). Now, Abhijeet invests into a ULIP for which Mr. Raghav again bags a commission of 30-40%. The real reason to change the policy here was, Raghav was not happy with the small(?) renewal commission coming in from Abhijeet’s policy. So he made sure to change Abhijeet’s policy after every 3 years so that his upfront commission is secured.

What is worth noting here is, at whose cost did these deals happen? No prizes for guessing, its Abhijeet. His investment plans kept going for a toss and so did his life risk cover. All that he could get was a “Tax Saving” and some (illegal) passback from Raghav.

It is solely the short term view by the agent, wherein he is keeping his interests before those of the client, thereby making short term gains. But such agents also lose clients and business in the long term as they lose trust of the clients.

3. Minimum qualification requirement of the insurance advisor

It is surprising to note that the minimum educational qualification requirement by most insurance companies for a rural sector is 10^th passed and urban sector is 12^th Passed. Few days back I came across a Panwala and a car driver who were life insurance agents. I have nothing against Panwalas and Car drivers, but then these guys did not have a remote idea even about the tax slabs (forget about 80C or any other intricacies). I was just wondering, if this is the level of dilution of the insurance advisory, then naturally it would create a repulsion towards insurance. Imagine the reaction of a Doctor on getting advise from his driver regarding which insurance he should be buying.

The argument we keep hearing for the same is “We are creating employment for these less educated people”. Ok, but at whose cost ? Is it ok to let the investors get cheated so that these people get employment?

To control mis-selling, the minimum qualification level required to be an insurance advisor should be at least a graduate level. Till the time the regulator does not make such rules, its time we look at the qualification and knowledge of the advisor before we buy a policy.

4. Life Insurance as a part time business

We also come across several people being highly interested in working part-time and thus taking a life insurance agency. Again, I am not against people working part-time, but the question remains is, are they taking it as a serious business or a “time-pass”.

Taking an example, Mrs Archana (imaginary character) is a homemaker and wants to take up a life insurance agency as a hobby(!!). She has some contacts in her society, friends and other relatives. She manages to sell some policies in her closed circle by pushing her relations. But after a couple of years, all her contacts are exhausted and even she is “bored” of this business. She decides to stop the business and start doing some other business from home.

Now imagine, what would be happening to the people who have bought the policy from her.  If they have a service issue or a query related to their policy, whom should they contact. Because Mrs. Archana has a single reply, “ I have stopped doing business of life insurance. Please do not bug me on that”.

In most cases, this part-time business model works more like a “Hit and Run” business wherein the agent sells maximum policies to his/ her contacts in 1-2 years and then change the business. The victims are the people who bought policies just to “maintain good relations” with them.

5. Selling on Catchy names

We also have a category of investors who buy insurance because they happen to like the name, than to have look at the product features. Please refer to my blog “What’s there in the name ?” (http://professorbajaj.wordpress.com/2010/06/17/whats-there-in-the-name/)to have more idea about the misleading nomenclatures of the financial products.

To cut it short, the following steps could be taken to prevent mis-selling of insurance:

1. Till the time mis-selling is difficult to stop, we can ensure that we don’t do a mis-buying of insurance.

2. Keep updating your knowledge on your insurance needs. Don’t buy for emotional reasons.

3. Never mix insurance with investments. Go for term plans and take a good amount of life risk cover at a lower cost.

4. Buy insurance solely for the purpose of insurance and not to “Save Tax”. (The reason to state this explicitly is, if tomorrow the tax incentive is gone, do not give up on insurance premiums).

5. Check the quality of advice for insurance than get lured by “passbacks”. Do not expect a free lunch. Free lunches might prove to be costly.

6. Stop the blame game. Do your own homework before buying insurance. As they say “It is easier to protect your feet with slippers than to cover the earth with carpet”.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.comif you have any questions.

(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgment and consult their investment advisor before making any investment decisions.)