Customers, agents blow up cover
Recently, the Reserve Bank of India (RBI) issued detailed draft guidelines on mis-selling financial products. The focus was largely on insurance products that were bundled with loans, and sold forcibly, with manipulations and nudges through advertisements, and messaging. From the draft, it seems that the banks and their staff, as sellers, and agents, as their representatives, were the main culprits. However, a recent survey reveals that buyers are as much responsible as the agents (sellers) for the myths and fallacies around insurance. There were knowledge gaps, misunderstanding, and a surprising lack of intent to learn and know on both sides of the table.
Although the survey’s sample size is quite low, and includes 300 respondents for qualitative discussions, and 450 for a quantitative survey across 20+ cities, the insights seem intuitive. From the buyer’s perspective, the conclusions are depressing. “Buyers miss how premiums, benefits, and risks evolve, which skews expectations, and often leads to disappointment or disputes later…. Many customers do not ask questions: They accept the agent’s view, and do not compare alternatives. This leads to incomplete understanding, and a higher chance of disappointment later,” states the survey. Let us begin with the time spent before making the purchase decision.
Almost two-thirds of the respondents receive less than an hour of explanation from the agents, which is “too little for multi-years contracts, resulting in incomplete product understanding.” Of this percentage, nearly half, or more than 30 per cent of the respondents, get less than 30 minutes of the agent’s time. While one can construe this to be the fault of the agents, which it is, the insight brings to light the laziness and complacency on the part of the buyers, who do not wish to spend time to understand the product, and rely too much on the agents.
Buyers’ bad destiny with insurance is visible from the following. A large chunk of the potential or actual policyholders does not know the key differences between the available products. For example, half of the respondents did not understand the variations between ULIPs and endowment policies. This is more surprising because most owned either of the two policies. “They bought insurance purely on the agent's pitch… trusting the presentation rather than the product. The decision was guided by how the numbers (projected returns, bonuses, etc.) were shown… not by what they were actually signing up for,” States the survey.
Similarly, the policyholders did not know what total returns, and inflation-adjusted ones mean. This is the difference between nominal gain, the gross value, and real one, or what is left after inflation adjustment. As the survey explains, “An eight per cent nominal return with six per cent inflation translates to a two per cent real return.” It adds ominously, “Since the returns shown are typically nominal returns, outcomes are likely to be overestimated.” In some cases, real returns may be negative. In other words, the purchasing power of INR1,00,00,000 received after 15 years is just over INR40,00,000, or less than half of the amount.
Obviously, as the policy matures, or even during the time it is in operation, buyers tend to feel dismal, frustrated, angry, desperate, and under confident when they realise the bitter truths, and separate the myths from the realities. As the survey shows, 47 per cent later report that the returns were lower than expectations (or original estimations), and almost 40 per cent feel that they were “misled” or “under-informed.” Logically, one can blame the sellers. But in the modern marketplace, the overriding mantra, despite the powers of, and need for, stringent regulations and penalties for mis-selling, is still ‘Buyers Beware.’ It is not surprising that because of such experiences, the trust in agents is low and minimal. Yet, it is ironic that policyholders still depend overwhelmingly on the agents, as mentioned earlier.
Coming back to the survey, less than 15 per cent of the respondents gave the agents the highest ranking of 5. Nearly 50 per cent of the former rated the latter at either 2 or 3. “Overall, trust in agents remains moderate, suggesting that while many customers are not outright distrustful, few demonstrate strong confidence,” which reinforces the need for better communication and deeper engagement between the two sides.
Let us peek into the lives and mindset of the insurance agents. To begin with, insurance is a part-time, or second job, for them. Nearly two-thirds of the agents admit that it is a “secondary occupation.” According to the survey, “Lack of a fixed timeline, and variability in the level of income are often cited as some of the key reasons for having more than one occupation.” Yet, more than 60 per cent of the agents seem satisfied with the ‘side’ or ‘main’ income, which implies that the existing commission model may be both “rewarding and sustainable.”
Agents, as one knows intuitively, are under pressure from the insurers, especially the large firms. One-third of the agents in the survey admit that “they have had to focus more on their (corporate) targets than on their clients’ needs.” Almost half of them, therefore, are compelled to “sell specific products (which may be high-premium and, hence, high-commission insurance products) to meet contest targets, either occasionally or always.” (Contest refers to “short-term incentive schemes or sales competitions run by the insurers” to achieve internal targets.)
Obviously, in many cases, to sell the more expensive products, which meet the targets and earn higher commissions, the agents need to induce the buyers. Almost 40 per cent of the agents acknowledge that they “pass back part of their insurance commission” to the buyers. This is dangerous as it points to the existence of “rebate-linked inducements… despite regulations against it.” Both the agents and buyers cross the legal boundaries. In most cases, the customers are blissfully unaware of the transgression, and confidently and categorically demand that the agents pass on a part of the commissions.
A report by the insurance regulator shows how these two intersecting, yet divergent and standalone, trends related to policyholders and policy-sellers impacts the sector. The persistency ratio is as high as 70 per cent in the thirteenth month, or one year after a policy is purchased. But it threateningly drops down to less than 50 per cent in the sixty-first month, or after five years. Since the persistency ratio measures how many policyholders continue paying the premiums, both the drops, and especially the one after five years, signals a huge gap that forces many buyers to give up on the existing policies.
