Consumers are taken in by insurance hardsell

Corporates may plan their strategies inside their boardrooms, but individuals are hard put to draw up their personal finance plans.

They are forced to fall back on generic, macro-level options, such as the provident fund scheme (both public and employer-based). While PF enables an individual to achieve some of his/her financial goals, such ‘safe havens’ are shrinking today. Individuals are forced to scout for options. Insurance products have played a role here.

Let us have a look at the insurance industry. The Government claims that insurance penetration and density at 5.1 per cent in 2010 is a marked improvement from 2.71 per cent in 2001, which would indicate that people have embraced insurance as a mechanism of financial planning. But the reality is otherwise. Customers are confused, unhappy or downright disgruntled. Why so?

CONSUMER MISGUIDED

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.

To try and contain mis-selling and churning, the Insurance Regulatory and Development Authority (IRDA) has been on overdrive, issuing one regulation 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.

A case in point is pension products, which are no longer being offered by insurance companies, since the new regulations have made it unviable for these companies to offer such products.

If mis-selling has created problems, that has a lot to do with financial literacy.

The OECD (Organisation for Economic Cooperation and Development) defines ‘financial literacy’ as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.

BANKS RESPONSIBLE

The RBI, IRDA, SEBI and PFRDA (Pension Fund Regulatory Development Authority) are major stakeholders in the financial literacy programme.

But each stakeholder tends to act in isolation. Insurance mis-selling within bank premises is not controlled by the RBI (on the ground that it is in no way involved in the selling process). The IRDA is supposed to act in such cases, despite the number of occasions when insurance is bought under bank pressure.

If a bank branch is like a country, then an insurance wing operating out of a bank branch is like a foreign consulate located in that country. A country cannot remain silent on any irregularities in visa issuance by the foreign consulate located within its boundaries.

The RBI should also note that the fee income of banks is paid by banking customers. It is not because of insurance they visit the bank branch, but because of their banking needs.

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.

Despite the high incidence of mis-selling in bank premises in the case of insurance products driven by commission structures, PFRDA wants NPS to adopt more or less the same strategy.

Banking is an unrivalled platform for effective distribution of financial products. Insurance companies, mutual funds, pension funds are competing with each other for entering into tie-ups with banking entities.

However, no single financial product can solve an individual’s problems. The regulators concerned should stop acting in isolation.

(Saravanan is an Associate Professor at IIM-Shillong. Jayaprakash is co-founder of Nanobi Analytics, based in Bangalore.)

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