To avoid the mis-selling of insurance products, it is important to change the manner in which agents earn their commissions. Also, policies should be written in a language that the lay man can easily understand
The Insurance Regulatory Development Authority has from time-to-time warned that there is a need to reduce commissions for selling life insurance products. A committee has also submitted a report on mis-selling of insurance products.
However, a few changes can re-define this playing field. First, is to change the pattern of commission that is given to the agents. This has been persistent over the years. The current commission scheme results in over-selling, which results in lapsed policies. This in turn profits the agent and the insurance company, but are regressive for the industry in the long-term.
Also, there is an issue with regards to the language of the policies. language is a barrier and makes it difficult for the policy holders to understand about the policies. At present, the commission paid for the first, second, and subsequent years can typically follow the pattern 25, 7, 7, 5, 5, 5, ... as the percentage of yearly premium or thereabouts. This biasing of the commission payable towards the first year makes it lucrative for both the company and the agent to hard sell a policy, get the premium for the first year, and then sit back.
For the insurance company, such a hard sell is even more lucrative as the money does not have to serviced in any way, it goes straight into profits. For the agent, it is a long-term loss if the person does not keep paying the policy but the gain in the first commission instalment usually compares with the total of the next five.
If the premium is paid in the fourth year then it is near certain that the insured person has bought into the product and will most pay the premiums for the entire term. (Premiums often paid in the second and third year are to regain the surrender value). A commission of 30 per cent of premium in the fourth year will dis-incentivise agents from making short-sighted sales and induce them to view the long term. A comparable total benefit yield would be a distribution pattern of say 3, 10, 10, 30, 5, 5... . Corporate agents will have to invest more from their own pockets as they give a hefty commission to employees for the first year and nothing subsequently; they would get back their investment if the policies last for more than three years. This would induce insurance companies as well as individual and corporate agents to sell responsibly.
Second, is a lapsed policy at the end of the first year. A cap on the first year lapses should be in place based on the total business the insurer is doing in that category of insurance. Beyond the cap a hefty penalty should be levied; a similar scheme should be applicable to individual agents. For this the aggregation of lapsed policies should be declared separately; this interesting statistic would give people an idea of the machinations of this sector.
lIC provides its policies in English and Hindi for the 15 day Free look period during which the policy can be returned by the insured person; most insurance companies provide it only in English. The English version should be vetted by a person who does not have a legal degree or better still, ask some English-medium Class 12 students, if they understand it. According to the Act whenever there is a doubt about the language, the meaning is to be made in favour of the client. However if the meaning is clearly understood only by legal eagles and not ordinary readers, then what is the use of a Free lookIJ
life insurance is sometimes referred to as a freedom trap; it frees you from a lot of worries in case of terminal scenarios, on the other hand you pay ceaselessly year after year. Don’t forget that Warren Buffet built his portfolio starting with core investments in the insurance sector; it is a sector which provides assured returns over the long term. Tinkering with the commission as suggested would initially decrease sales of policies and it would act as a block to newcomers relying on hard sell tactics to grow. It would make insurance agents and companies more responsible and improve the service standards of this industry.