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Mis-selling of life insurance policies through the bancassurance channel is today hitting media headlines more often than before. For instance, businessline dated October 31, 2023, reported that the Insurance Regulatory and Development Authority of India (IRDAI) had “formed a taskforce to look into various aspects of the bancassurance channel, including mis-selling.”
And on April 26, 2024, this newspaper had a report headlined: ‘RBI, IRDAI lens on SFBs for forcing insurance products on borrowers.’
Banking products are largely understood by most consumers, but non-banking products like life insurance are not so easily understood mainly owing to their complexities Mis-selling can occur if banks’ sales teams don’t explain, deliberately or due to less knowledge, all the features of non-bank products to their potential buyers. Sometimes, the needy borrowers are forced to buy non-bank products.
Quantifying the problem
Indian banks forayed into cross-selling in the 2000s to supplement their net interest income with fee income. However, there is still no systematic database on mis-selling. We could collect data for just five years (2016-17 to 2020-21) from various issues of IRDAI Annual Report and Consumer Affairs Booklet. The Chart illustrates the data.
Mis-selling in life policies through all channels as well as through bancassurance gradually declined during the five-year period at a compound annual rate of 18 per cent and 14.6 per cent, respectively. The rate of decline in mis-selling was lower in the bancassurance channel than in ‘all channels’. Further, the share of banks in the total reflect an uptrend. Both are worrisome.
The government, regulators and insurers including bancassurers are trying their best to rein-in mis-selling particularly in the life segment, as mis-selling potentially generates reputational and fraud risks, which, coupled with strong interconnectedness between banking and insurance segments, may transform into contagion risk for the financial sector.
The following best practices for insurers/bancassurers can help curtail mis-selling.
Targets must be realistic: The business targets need to be scientifically determined, especially in a top-down management system, instead of being ‘ordained’ from the top.
The targets become realistic and achievable when the ground-level environment is factored in. Experience and insight of the entire marketing team must be taken into confidence, which requires two-way information dissemination.
Targets — pursue but don’t obsess: Targets need to be pursued sincerely and diligently, without being obsessed with achieving them. There should be sufficient built-in flexibility at each hierarchical level. Also, there needs to be defined timelines for meeting the targets, and the progress needs to be regularly monitored and adjusted for under- and over-achievement.
Quality is important: Achievement of targets needs to be ‘durable’. One should be concerned about the quality and more significantly, at what cost — including physical and psychological cost to the employees — the targets are achieved.
Further, the management has to look at the ‘compromise quotient’, that is, to what extent the company’s ethics and integrity on one hand and consumers’ privacy on the other are compromised.
Corporate policies — ‘carrot’ versus ‘stick’: Corporates must institute definite board-approved corporate governance policies for determining incentives/disincentives as also identifying, fixing and punishing the culprits including those in the top management when a ‘misconduct’ occurs. The policy must balance the ‘carrots’ and ‘sticks’ in an incentive/disincentive programme.
Risk mitigation — don’t neglect: Overly aggressive policies are prone to ‘fraud’ and ‘image’ risks. Therefore, it must be seen whether appropriate risk amelioration measures are in place. These should encompass human capacity building by providing the sales staff training in products and customer acquisition at banks’ training centres, all-India training institutions as also on-site at the insurers. Personal contacts, rather than sales through technology, do matter in the life segment.
Self-regulation is vital: Instead of waiting for regulators’ prod, there should be effective self-regulation for which some institutions exist. The efforts and advisories of these institutions and their members must be disseminated publicly.
Consumer research can lubricate efforts: Target achievement becomes smoother if bancassurers continuously track consumers’ perceptions, tastes and preferences, especially today, when the turf is changing rapidly with fintechs storming in.
Need for contemporary consumer protection laws: The government should constantly attune its consumer protection laws with the changing business environment and institute a framework for their timely and effective enforcement and delivery of justice.
Financial literacy, a must: It is the duty and responsibility of the market players to make the consumers financially and digitally literate so that they, in turn, can discipline the excessively aggressive employees and avert, ab initio, future crises.
Alert consumers can firewall: Consumers have a significant role to play by staying alert against any over-activism by any financial entity (read Ponzi scheme) in their locales and bringing the same to law-enforcement agencies’ notice.
Construct database: IRDAI should build and publish dis-aggregated time-series data on mis-selling by insurers/bancassurers.
These best practices will ultimately help IRDAI strengthen the “three pillars of the insurance ecosystem” — policyholders, insurers and distribution channels.
Das is a former senior economist, SBI
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