Life Insurance – mis-selling and cures

Despite insurance companies swearing about their customer friendly and anti-fraud approach, the complaints of insurance miss-selling are on a rise, why this contradiction?

Saying we are customer friendly and being customer friendly are really 2 different things. If a customer really understood risk and bought only risk products NO INSURANCE company will be able to afford all the overheads that they have. Most of the mis-selling comes when they sell ‘investment products’ which promise about 13% per annum buy actually yield about 4%p.a.

If they do not mis-sell, there will be NO SALES, make no mistake. So obviously there is mis selling. IN a country where national savings certificates and PPF give about 8.5% p.a. WHO WILL BUY A 4% yield product’? Hence the mis selling.

–          Are the companies, their employees or agents honest enough in telling prospective customers the truth of the insurance products which they are going to buy?

No. They dare not. See the real returns of Endowment plans, Money Back plans, etc. ALL OF THEM would have yielded less than bank FD returns. So to hide this, they create big documents to confuse the people with tax impact, post tax return, etc. – all this is subterfuge – the returns are sub bank Fd. Period. So telling the TRUTH the way the client understands CANNOT BE DONE.

–          In the name of insurance penetration, both the Government and IRDA seem to close their eyes towards the malpractices prevalent in the insurance sector. What is the solution?

Look I have said this a billion times – the only protection that an Investor can really get is EDUCATION. He/she needs to know what amount they are investing, what to expect, and what has really come. If a person has bought life insurance in 2004, 2008, 2012 – one has to assume that he/ she is HAPPY WITH THE PRODUCT, and therefore buying a similar product again and again.

Customer has to behave much much much better – and sensibly.

–          The discussions are going on to allow banks to sell the products of all insurance companies (act as broker) with the caveat that in case of miss-selling the banks will be responsible. Will this step help to curb the menace of insurance fraud?

No. It will not. This has come a full circle – first IRDA said banks should become brokers. RBI said no. Now RBI is saying banks should become brokers. Difficult to understand, but the BIGGEST beneficiary will be LIC. With their investing clout they will be able to FORCE every bank to sell their products. The other big insurance companies like Hdfc and Icici will also benefit because they may increase their ad budgets and increase the points at which their products will be available. The banks may not spend enough money on training, so mis-selling will increase, not decrease – at least in the short run. Frauds will INCREASE, not decrease – more banks will be under sales pressure, not LESS.

–          If as a broker, bank can be made responsible for miss-selling, why can’t the individual agents of the companies?

Most insurance companies turn a blind eye to mis-selling. Only when a customer complains do they act as if it bothers them. Most products are of poor design – too much upfront commission being one of the defects. The other defect is ‘compulsory pay for 10 years’ – the surrender is so bad that most people will not be willing to surrender it. SO IT IS A DESIGN FAULT and supervision fault. A bank can be made responsible because the insurance company can sue them, take action against them, etc. but an individual just vanishes. He might exit the industry – a bank will have to make good the losses – to the client and the insurance company.

–          Even today insurance products are sold as investment products and the companies pitch their sales strategy around this misconception only, what are the ways out to break this myth? 

Media, IRDA, etc. should show people what returns are ‘normal’ in a 30 year plan. People should understand that insurance is a RISK product, not a ‘return’ product. If you want insurance, take TERM INSURANCE – not endowment. Even today life insurance companies pride themselves on the AUM that they have, not on the SUM ASSURED figure! And fund management is far far more profitable than peddling risk.

Ministry of Finance has to make the changes that it claims to espouse.

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  1. Hi, I had attended a training session for a new product launch by a Prestigious Insurance Company. I was amazed by the perception of the trainer advising their channel partners. He was telling that our whole population is lacking in insurance knowledge hence it is very easy to push the products by talking to the prospective clients in an emotional manner. He was showing some graphs with eye catching colours and numbers, the people present in the session were so overwhelmed that the product can be pushed very easily. I sat across separately and asked few questions regarding the viability of the product to generate so much in the future for which I was told not to worry because it is being taken care by very well trained analyst and the creation of the product has taken 6 months of labour from IIT and IIM graduates who are much more intelligent than we are. I feel the research has been done to find out what are the possibilities of the product failure from marketing point of view rather than viability point of view. God save the people who buy these products from these companies

  2. Hi Subra,

    Great Articles….and make a excellent reading.
    Can you have an article on Insurance on Home Loan Cover.
    Which is the best way to insurance your home Loan. Is it better & safer way – a Term Plan or a Home Loan Insurance Plan.


  3. Jairam Gopalan Aiyer

    Dear Sir,
    How many people have followed buy Term Plan and save in MFs and / or equity on a Long Term Basis? And would you like to share some live examples?

    I would be very happy to know that Human Beings beat Human Psychology.

    I am open to your reply.

    Warm Regards,
    Jairam Gopalan Aiyer
    IRDA Composite Insurance Agent

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