Deepak Yohannan of myinsuranceclub.com explains the reasons behind mis-selling of insurance policies, which is the reason behind the sector's downfall in the country.
The practice of mis-selling is so common in India that even Finance Minister P Chidambaram is troubled. While talking to reporters earlier this year, he pinned mis-selling as "the reason why insurance is stumbling in India."
Business has been booming for the insurance sector ever since it was privatized in 2000. But it has not been a smooth run, and it certainly has not been kind to investors. A recent study by a national newspaper revealed that investors lost more than Rs. 1.56 trillion over the span of a seven-year period that ended in 2011-12.
Insurance is supposed to protect, not trap investors. Yet, agents and insurers are known to be unscrupulous. Mis-selling is something most insurance buyers have experienced at some point. So what is it that makes insurance in India so susceptible to mis-selling?
1. Birth of Investment-cum-insurance Products
The unit-linked insurance plan (ULIP) was born in India in 2002. Reports of mis-selling are invariably connected with this product. Part of the reason is that buyers find the traditional term plan unappealing because when the term ends, the policyholder gets nothing. But ULIPs and other endowment plans promise not only a death benefit (no matter how meagre) but investment possibilities as well.
2. Agents’ Eagerness to Earn High Commissions
Unit-linked policies are known to pay higher commissions, which is why in the post-2002 period agents began to sell such plans at the cost of traditional ones. Moreover, now that more players had entered the insurance markets, agents no longer needed to maintain long-term ties with a single insurer—they could jump from company to company too.
3. Expectations of Short-term Gains
Insurance shoppers conveniently forget that insurance, particularly life insurance, is ideally a long-term product. Lured by the promise of high returns and the ability to grow one’s investment in the short-term, many policy buyers treat insurance as a quick investment opportunity, not realizing that unit-linked products are nearly always front-loaded and that exiting early is not beneficial.
4. Policy Buyers Do not Read the Document
Policy buyers satisfy themselves with the insurance agent’s sales pitch, particularly if the agent is a friend or relative. This is a mistake because even if your agent has your interests at heart, he may miss informing you about important clauses.
5. Expiry of the Free-look Period
The free-look period is a 15-day window following receipt of the policy bond during which the policy buyer can return the policy if the terms and conditions are not to his liking. However, many a time, the delivery is rigged such that the mis-sold policy does not reach the customer in time.
6. Lack of Awareness of the Customer
This represents the main reason why mis-selling is so common in India. Many customers do not understand that insurance is intended primarily for risk protection—not for tax savings, not for investment. Awareness is crucial if the consumer is to receive a policy that truly meets his unique requirements.
So, is there a solution? Chidambaram himself presented one method: “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.” Given that insurance penetration currently represents only about 4 percent of GDP, this is good advice; mis-selling only hampers the sector’s growth possibilities.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.