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:
- 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.
Mis-selling is mostly in life insurance sector and is also prevalent to an extent in health insurance segment where misrepresentations about benefits or coverage or both are made to solicit and sell health cover. In non-life policies, there is not much of mis-selling. The focus therefore is on mis-selling in the sale of life insurance products.
COMPLAINTS & IMPACT OF MIS-SELLING:
There has to be a policy level change to ensure that agents who cross a certain level of mis-selling are not hired by any other insurance firm. Complaints on unfair business practices affect the sentiment about the insurance sector in general and life insurance sector in particular. This would significantly impact the initiatives aimed at enhancing the level of insurance inclusion as measured by indicators such as insurance penetration (measured as ratio of premium to GDP) and insurance density (measured as ratio of premium in USD to population). Increased incidence of mis-selling can adversely impact growth in the insurance industry which in turn would impact the availability of long term funds for economic development from the insurance sector. Hence, while there is need to assess and eradicate mis-selling from insurance industry, there is also a need to reassure general public that the regulatory framework of insurance business is sound enough to protect policyholders’ interests and grievances, if any, are capable of being resolved by insurers or settled / adjudicated by insurance ombudsmen or consumer fora. Integrated Grievance Management System (IGMS) introduced by IRDAI in 2011 is a computerized industry-wide grievance repository for the insurance sector. In IGMS, the complaints relating to mis-selling are included under the broad category of “Unfair Business Practices”. The complaints relating to broad head of ‘unfair business practices’ consist of complaints falling within the following complaint descriptions:
- 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
The number of complaints relating to unfair business practices in life insurance business has come down, while the percentage of unfair business practices complaints has increased.
REGULATORY FRAMEWORK:
If you are a policy holder of a life or non-life insurance product, chances are that your policy needs have not correctly been met. The agent who so sweetly and subtly coerced you into signing that policy, has most probably, unknowingly or otherwise, sold you the wrong product. Mis-selling of policies is going on for a while but has assumed greater proportions as of late.The basic framework for regulation of insurance business is contained in the Insurance Act, 1938. The IRDA Act, 1999 established IRDAI as the regulatory authority to enforce the provisions of the Insurance Act. The following regulations made by the Authority are aimed at ensuring that mis-selling does not take place.
- IRDA (Protection of Policyholders’ Interests) Regulations, 2002
The basic framework for policyholder protection is contained in these regulations. Procedure to be followed at the ‘point of sale’, requirements to be complied with at the proposal stage and disclosures to be made in the life insurance policy are clearly stated in these Regulations. These Regulations contain a provision for free-look cancellation within 15 days of receipt of policy. On availing of the free-look cancellation, the insured would be entitled to a refund of the premium paid. In case of ULIPs, the insured would also be entitled to repurchase the units at the price of the units on the date of cancellation.
- The IRDAI (Insurance Advertisements and Disclosure) Regulations, 2000
These regulations require the insurers, agents or intermediaries not to issue “unfair or misleading advertisements.” The Master Circular Ref: IRDAI/ LIFE/CIR/MISC/ 147/08/2015 dated 19- 08-2015 issued on Insurance Advertisements, clearly prescribes the details to be made available in the advertisements, and also indicates the do’s and don’ts amongst other requirements.
- 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
With the increasing recourse taken by insurers, corporate agents and brokers to solicit policies including lead generation through telecalling, SMS, email, internet, DTH, postal mail and other modes which do not involve communication in person as well as requests from clients seeking information and sale of insurance products in distance mode, IRDAI issued Distance Marketing Guidelines.
- IRDA (Non-Linked Insurance Products) Regulations, 2013
- IRDA (Linked Insurance Products)Regulations, 2013
- Grievance Redressal Guidelines for Insurance Sector 2010
IRDAI has also provided channels for customers to raise grievances with insurers in the form of Integrated Grievance Management System, IRDA Grievance Call Centre and postal, fax and email channels. If not satisfied can take up with the Insurance Ombudsman or approach Consumer Fora or Courts.
- Corporate Governance Guidelines – Policyholder Protection Committee
With a view to addressing the various compliance issues relating to protection of the interests of policyholders, each insurer has been directed to set up a Policyholder Protection Committee which directly report to the Board. The responsibilities of the Committee are to address complaints and grievances of policyholders including mis-selling by intermediaries.
INSURANCE LAWS (AMENDMENT) ACT, 2015
The amendments to the Insurance Act, 1938 have been made through the enactment of Insurance Laws (Amendment) Act, 2015. In terms of section 42 (A)(2) of the insurance act 1938, no person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance policy through multilevel marketing scheme. Further, section 42 (A)(3) of the insurance act 1938 prescribes that the Authority may through an officer authorised in this behalf, make a complaint to the appropriate police authorities against the entity or persons involved in the multilevel marketing scheme. This Amendment Act vide section 42(5) of the insurance act 1938 also prescribes that the insurers shall be responsible for all the acts and omissions of its agents including violation of code of conduct and liable to a penalty which may extend to one crore rupees. These changes will enable the interests of consumers to be better served through provisions like those enabling penalties on intermediaries / insurance companies for misconduct and disallowing multilevel marketing of insurance products in order to curtail the practice of mis-selling.
The Regulations clearly indicate that the requirements of disclosure of “material information” regarding a proposal or policy apply both to the insurer and the insured. Further, every insurer is required to have in place proper procedures and effective mechanism to address complaints and grievances of policyholders efficiently and with speed. Therefore, the regulations ensure that the prospective policyholder is given a thorough understanding of the specific requirements and details required for taking an insurance policy. The insurer, agent or intermediary should enable the prospect to take the best cover that would be in his or her interest. These regulations mandate compliance of the agents, corporate agents, brokers and web-aggregators with the code of conduct prescribed therein to ensure that the persons soliciting insurance business should be eligible persons and they disseminate the requisite information in respect of insurance products offered for sale, understand the policy being sold and should be capable of making suitable advice based on the customer needs so that the policy offered / sold meets the requirements of the prospect. Responsibilities are cast upon the agents and other intermediaries in terms of code of conduct, which are mainly aimed at curbing the mis-selling and to promote best practices during solicitation of the business.
FINANCIAL LITERACY:
Financial literacy in the distribution channel itself is the main cause of mis-selling. It leads to underinsurance and improper coverage for the insured. The problem lies in a lack of training on part of the employer for need-based policy selling. The definitive way of reducing mis-selling is to make the members of public aware of the concept of insurance, kinds of insurance policies, risks covered, benefits offered, exclusions, and conditions etc. This is sought to be achieved through various efforts of financial education to improve financial literacy. These regulations ensure that the commission rates are consistent across the industry and have been smoothened with the payments depending on the premium payment term. The benefit illustration requirements have been made applicable not only to linked products but also to all the non-linked products also. The Regulations prohibit certain type of products like highest NAV guarantee, splitting of policies, accepting advance premium for long periods in case of linked products, prohibit mis-leading names so that there is clarity on savings and protection products in case of non-linked products. The regulations also bring in transparency in terms of benefit payouts and enable the customers to choose the right policy. In case of linked products the regulations for linked products make it mandatory for separate training to all the insurance agents/intermediaries before they are authorized to sell linked insurance products, recommending a suitable product and collecting sufficient information about the potential policyholder as a proof thereof, inform the upfront charges and indicate how premium paid is appropriated towards various charges from the unit fund and the balance of the fund at the end of the first year and subsequent years. An agent/ intermediary should obtain a statement of consent signed by the policyholder and countersigned by the person (agent intermediary etc) himself/herself, along with the proposal form, that he has understood the inbuilt features of the policy and the applicable charges and that he is fully aware of investment risks under the policy to be issued.
Insurers have also been taking the issue of mis-selling seriously by doing a root cause analysis of mis-selling complaints to identify the major causes and have taken steps to prevent or reduce mis-selling through steps to ascertain suitability of product, place controls on the various channels, tuning it based on the vulnerability of the channel and have a strategy on dealing with complaints of mis-selling. Insurers are now conducting sales audit of the proposals that satisfy certain vulnerability criteria like First time ULIP customers, Proposals from Senior Citizens, Premia payable not commensurate to the declared sources of
Income etc. to ensure right selling. Further, every insurer has a Board approved insurance awareness policy containing the strategy and efforts to build awareness among customers. This apart every life insurer has their company specific policy drawn on handling mis-selling and spurious call complaints. Insurers also take up action against the agents or intermediaries in the form of issuing warning letters, terminating employees, filing police complaints and most commonly resorting to claw-back of commission wherever the policies have been cancelled as a consequence of proven mis-selling. The problem of mis-selling of insurance is a major cause of concern in expansion of life insurance business. A lot of the hard sales push in insurance draws upon the basic human emotions of fear and greed. The minute you feel that the agent or distributor—who may well be a friend, a family friend or a neighbour—is talking of very high returns with very little risk, stay away. Avoid too-good-to-be-true products. Some experts feel mis-selling is happening more at the employee level and not the agency level. This can only happen when there is one thing missing in the relationship, and that is relationship. If there is emphasis on having a relationship, then mis-selling cannot happen as the advising agent wants to thrive on the life-time value of the relationship
The regulatory framework is adequate to prevent mis-selling. However, greater compliance with the relevant regulations, increased insurance awareness, simpler policy terms and conditions, greater adherence to code of conduct by agents and intermediaries, and self-discipline among insurance intermediaries & insurance companies can significantly reduce the mis-selling complaints without affecting the volume of new business. Since mis-selling impacts the trust and confidence on insurance companies, it is time the insurance companies wake up to the challenge and not only take initiatives in educating and empowering consumers leaving them the freedom to exercise an informed choice but also to rein in unscrupulous agents and intermediaries who are bringing business by resorting to cheating through false promises. Putting in place systems to examine complaints from the underwriting perspective and expeditiously redressing them where the policy appears inappropriate can help build trust in the public. The enhanced levels of penalties would also help in deterring insurers and intermediaries from resorting to mis-selling. However, penalty imposed would in no way compensate for the inconvenience caused to hapless customers subject to mis-selling or rectify the damage caused to the image of the insurance sector which serves a very important social purpose of providing social security to the insured and mobilise long term funds for investment for economic growth and development of the country. Today, the buyer finds it very difficult to prove mis-selling once he has signed the application form and most sign them without reading. In India, the regulatory regime is that of caveat emptor or buyer-beware. Globally, the regulatory regime is shifting towards caveat emptor or seller-beware. Under this regime, if there is a complaint of mis-selling, the onus is on the seller to prove innocence.
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
