The Reserve Bank of India and Securities and Exchange Board of India have been getting a lot of flak for ‘stifling’ the development of financial firms under their remit, with their hard-line stance on regulation and compliance.

But India’s insurance industry offers a good case study on what happens when a financial regulator prioritises industry development over consumer interests.

Amid strong growth in other financial assets, India’s insurance penetration has been flat-lining for a decade. Insurers have reported anaemic new business growth this year. The industry is attributing this to lack of consumer awareness, withdrawal of tax breaks, etc., and is clamouring for reforms. But the main reform that the industry needs is regulatory focus on ensuring that it delivers on its fundamental promise to its customer.

Flood of complaints

For a financial asset that attracts less than a fifth of household financial savings, the Indian insurance industry has a lot of unhappy customers. According to Insurance Regulatory and Development Authority’s (IRDA’s) FY23 annual report, the centralised grievance portal received 2.02 lakh complaints last year. This apart, the department of administrative reforms received another 12,542 complaints that were passed on to IRDA.

More than the sheer number of complaints though, it is their nature that is worrying. The break-down of complaints against life insurers shows that 20 per cent of them pertained to unfair business practices, while 22 per cent dealt with survival claims. If one takes LIC out of the equation, over 50 per cent of complaints against life insurers are about unfair business practices, which seems to be a euphemism for mis-selling (refer opinion/signs-of-market-failure-in-life-insurance/article67724413.ece).

If being saddled with the wrong product is the issue for life insurance buyers, general and health insurance buyers have to reckon with insurers not settling claims after a medical emergency or calamity. Sixty-six per cent of complaints against general insurers were about claims.

But despite such evidence of insurers failing to fulfil their primary mandates, IRDA has displayed neither bark nor bite in dealing with customer protection issues. Insurers have been asked to look into the root causes of mis-selling and conduct awareness campaigns. But unlike the RBI or SEBI which pass a score of orders every month levying penalties on their constituents, IRDA seems to be rather shy of cracking the whip. Its annual report mentions that after conducting 48 inspections and producing 72 reports in FY23, it issued 506 ‘observations’ to insurers and intermediaries. It did not levy a single penalty.

Anything but protection

The world over, the raison d’etre of the life insurance industry is to provide protection to families on death of the bread-winner. Not so in India, where the life insurance industry thrives on selling savings products camouflaged as protection. Browse through the product menu of any insurer and you will find scores of participating, non-participating, market-linked and guaranteed return products, with pure term plans lost in the clutter.

A financial presentation from LIC, which holds a two-third share of the industry, showed that nearly 95 per cent of the policies it sold and 66 per cent of the new business premiums it collected in FY23 came from participating products, which are savings plans. Pure-term plans accounted for 0.37 per cent of LIC’s new business premiums and 0.44 per cent of policies sold. While numbers for private insurers are likely to be better, term plans are still a marginal product on their menu.

This focus on bundled savings-cum-insurance plans allows insurers to dress up their products with truckloads of jargon on survival benefits, maturity benefits, guaranteed additions, loyalty additions, and so on. As a result, a majority of insurance buyers sign up without knowing what benefits they can expect. Many don’t even know if they’re buying a single or regular premium plan, market-linked or guaranteed return plan, traditional or pure term plan.

This reflects directly in high customer drop-out rates. Data from IRDA’s Handbook of Statistics shows that the 60th month persistency ratio for life insurers averaged 44 per cent in FY22, indicating that 56 per cent dropped out by the fifth year. This is actually win-win for the industry, which pockets hefty surrender charges on the prematurely terminated plans and goes on to sell new products to the same customers. A recent IRDA proposal suggesting a formula for surrender value is being met with push-back, with the industry demanding a ‘principle-based’ regulation on this.

Unhealthy claims record

Covid has been the trigger for Indian health insurers to double down on selling mediclaim policies as a panacea for cashless treatment in medical emergencies, with agents insisting that nothing less than a ₹1 crore cover will do. But most of us have personal experience of having to fork out cash to settle hospital bills despite having a large ‘cashless’ cover, thanks to last-minute disputes between the insurer and the hospital.

IRDA’s latest annual report has skipped presenting data on claims settlement for individual insurers. But an analysis of aggregate data from its Handbook for the last five years (FY17 to FY22) shows that health insurers paid only 73 per cent of the claims filed with them in value terms. Apart from repudiating 8 per cent of claims, they also disallowed about 10 per cent. The absolute numbers are large, with 74 lakh of the 8.3 crore health claims filed between FY17 and FY22 being repudiated.

The industry cites a variety of reasons, ranging from consumers ignoring fine print, to poor medical disclosures and over-charging by hospitals, to justify their high repudiation rates. But then the industry is also culpable for waiving medical check-ups, rushing through policy documentation and doing away with safeguard clauses on co-payment and sub-limits, when wooing customers to sign up.

IRDA and the insurance industry are currently engaged in crafting an ambitious blueprint for ‘Insurance for All’ by 2047 that seeks to extend their products to citizens from the hinterland and low-income backgrounds. Focussing on serving the needs of existing customers better would be a more laudable objective.