Giants of Mis-Selling

Institutions, such as banks, are the biggest perpetrators of financial
mis-selling. And this needs to be checked at the earliest

AS a child, I had heard the story of the goose that laid a golden egg every day and the greedy farmer who cut open its belly to lose all that he stood to gain. These days, it seems such practical wisdom is becoming increasingly rare. Take, for example, banks, which command great control over the way in which we manage our finances. Yet, they have continuously been moving away from their core banking activities, towards becoming financial behemoths selling an array of investment products.

In all this, the interest of the account holder has taken a back seat. Mis-selling by banks is rampant and it saddens me that it is not being checked by the Reserve Bank of India. In July, the Association of Mutual Funds of India (Amfi ) posted data on the commission income of the top distributors operating in 20 or more locations. The fi gures were interesting: not only has the commission income on sale of mutual funds gone up for the top 10 players, eight entities in the top 10 were banks.

While I don’t have any issues with banks raking in the moolah, this is the conduit through which sales have been rather dubious, to say the least. This is evident from the alarming rise in the number of complaints against mis-selling by banks. In fact, when I recently checked the data for big distributors who have lost out on commission, I found brokerages to be the biggest losers, with just one bank, State Bank of India, in the list. I also looked up for data on the distribution channel,
which accounts for most sales of insurers.

First, many banks have insurance subsidiaries in both the life and non-life space. Second, the regulator has allowed non-bank promoted insurers to form tie-ups with banks to distribute insurance products under the bancassurance model. Last year, for bank-promoted insurance companies, on average more than 50 per cent of the business was from bancassurance. For the non-bank promoted ones, it contributed 20-25 per cent. The advantages of routing business through banks are obvious. First, the cost of sale is low for the insurer. For banks, it is an extension of existing business that earns them additional income with very little effort.

In an ideal world, this would have solved the problems of underinsurance and low penetration of mutual funds. But the outcome is something else, thanks to the transaction-based approach followed by banks compared with the advisory model followed by independent agent advisors and distributors. It’s usually the agent who has little to defend himself and also take the fl ak for mis-selling. The question is: why would the agent adviser kill the golden goose? After all, for generations, the colony uncle selling insurance did so with the best of intentions, even paying premiums during emergencies and standing by his customers when they needed to foreclose policies or borrow against them. Yet, it is this class of distributors that becomes the soft target.

I am not dwelling on the Shivraj Puris of Citibank, or certain high networth individuals taking their bank relationship managers to task and getting their due. Such cases are few and far between and, besides, those who lost their shirts to these people deserved to lose. I would blame it on their greed as well. In all this, I fail to understand why RBI, Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (IRDA) have turned a blind eye to this ‘institutionalisation’ of mis-selling. A simple solution is to make bank relationship managers accountable for the sale transactions they undertake. The bank is one Goliath that a David (read: investor) alone cannot take on. Many Davids have to come together.

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The Reported Allowing Of LIC To Have Over 10 Per Cent Stake In Companies Implies That Policyholders’ Money Will Continue To Get Misused

Down the Drain

The Hollywood movie Inside Job has achieved a cult status as a great documentary that vividly explains the 2008 market crash. In the backdrop of news reports on the Life Insurance Corporation of India (LIC) being allowed to have stakes in companies above the 10 per cent limit set by the insurance regulator, I am tempted to make a documentary on the functioning of LIC—the way it collects, manages and invests money. With assets of at least `1,20,000 crore managed during the last fiscal, LIC
is no small fish compared to the 40 asset management companies (AMCs)in the Indian mutual fund industry that manage about `70,000 crore.

In this backdrop, LIC’s equity investments play a crucial role in the stability of Indian stock markets and help the government with several of its unsuccessful divestment attempts. Therefore, the government’s reluctance to let go of its control over this cash cow is only natural. Unlike the government’s stake in PSUs, LIC’s assets belong to the policyholder, whose interests seem to be of little concern.

In fact, LIC’s structure is so complex that most policyholders are unable to relate to its mission statement: ‘Enhancing the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns, and by rendering resources for economic development.’ What the behemoth definitely does is improve the quality of life of its employees and agents, something I will talk about in a column some other day.

LIC’s investment in several PSUs is like deliberately chasing bad money. It is common knowledge that bulk deals in a stock often result in its price going up, which creates a demand-supply mismatch. But it does not enhance the value of the stock being bought, which is exactly what happens every time LIC buys into a company. Its recent investment in ONGC apart, several PSU banks have benefited from LIC picking a stake in them—their stocks started to trend up the moment LIC bought a stake only to fall within a matter of days. Obviously, the real value of these stocks is less, but when LIC buys them, it pays more.

In effect, you as a policyholder lose. The new diversified ownership structure following a stake sale makes corporate governance an important issue in emerging economies. However, when LIC invests in PSUs, there is no change in governance even when LIC gets its members on the board. That’s because usually its board representatives are retired and serving government bureaucrats who lack the motivation to look after small investors’ interests.

For the policyholder, money going into such transactions is a double whammy—they don’t have any say in how their money is invested and they find their so-called representatives acting against their interests. The only assurance that policyholders have is that because LIC is a government-backed entity, their money is safe. Most LIC product do little to serve the policyholder’s interests: wafer thin insurance, opaque investments and paltry returns over the long term.

Over the years, LIC has lost a great opportunity by not propagating financial literacy or an equity culture that a state-run financial institution could have done. The issue isn’t about LIC having a more than 10 per cent stake in firms; the tragedy is that these firms are bleeding. Because LIC has no fiduciary responsibility when managing policyholders’ money, it takes refuge in its sovereign guarantee instead of making prudent investments. It makes you ask why one would knowingly invest in Kingfisher Airlines unless one doesn’t care whose money goes into investing in a dud.

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Arbitrarily Taxing

With the Budget raising tax exemption limit for individuals by a pittance,
the 2 per cent jump in service tax will only drain you of your wealth


The much-awaited rate cuts by the Reserve Bank of India did not happen. The Railway Budget was at least not boring, especially the political showdown after the minister presented his Budget proposal in the Parliament. The last event of that week, the Union Budget, was a damp squib; it had nothing to cheer about for anyone. A lot has already been said about the zero or negative impact of the increase in tax slabs, where the taxpayer will be able to save only `20,000 more a year, while the tax on services annually adds up to a lot more than the savings. The finance minister, in his wisdom, has offered tax exemptions on savings bank interest income of up to `10,000, which was so far taxable.

Why will anyone wish to earn an insignificant cant sum from a savings bank account when they can earn more from a fixed deposit or more tax-efficient returns from a liquid fund? If the argument is that such savings are for small savers, they need to have `2 lakh to `2.5 lakh n their savings bank account to earn  `10,000 as interest income. Personal income tax seems to be sans any logic. Take, for instance, the`1 lakh tax-saving limit offered under Section 80C of the Income Tax Act, 1961. It is uniform across taxpayers. Which means for someone earning `3 lakh a year; 33 per cent of this income needs to be diverted towards tax-savings instruments to get to a zero-tax state.

Compare this to someone earning `10 lakh; the sum needs to claim tax benefits are just 10 per cent of his income. Common sense will tell you that for someone with low income it is that much more difficult to invest to save taxes compared to those earning more.

The government may argue that it is being equitable when it comes to offering tax benefits to all taxpayers. The lack of reasoning or logic behind tax savings goes further when one analyses the various products that one can invest in to receive

tax benefits. In the absence of social security, the central government should ideally have stated its intent towards long-term needs with tax-saving instruments, which would have found many takers. Yet, there is hardly any long-term tax planning scheme on offer. The equity-linked saving schemes (ELSS) have the shortest lock-in of three years and the Public Provident Fund (PPF) is a 15-year plan. I am not getting into the New Pension System (NPS) because its very status is still debatable.

The very premise of income tax takes into account the government’s income needs and not what works best for the taxpayer. It is for this reason that we have seen frequent changes in tax rates, rebates and tax-saving instruments. Let me illustrate with an example. At a very basic level, life insurance needs are arrived at by taking into account one’s income. If the government had worked towards an insurance scheme linked to one’s income, it would have got 35 million policyholders immediately.

The sheer number would have forced insurers to lower costs on pure term plans and it would have ensured that every income earner is adequately insured. Likewise, if the tax savings on health insurance was instead used

for a health insurance plan, it would have done wonders. reckon that the requirements of over 90 per cent of taxpayers is basic; they need a term plan to protect their dependent’s future finances, they need a robust health insurance plan to get treated for illnesses they may contract, and save towards a secure pension plan for their retirement. If the government had worked on tax benefits with these issues in mind, it would have done a great service to all taxpayers and also to its own coffers.

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Probing Your Probity

IRDA’S proposed data gathering sheet is laborious and time-consuming.
It will put off both prospective policyholders and agents alike

It’s the examination season, and last week I overheard a conversation between two students on the number of sheets they used while answering. The discussion moved towards how certain teachers award higher marks to students who use more sheets, especially in subjects like English, history and economics.
The insurance regulator seems to be inspired by the examination season in releasing the proposed exposure draft on guidelines on prospect product matrix for life insurance.
While the move will bring in the much-needed standardisation in filling insurance
forms, it is not suitable for the Indian market. First, the guideline assumes that insurance is bought only by the literate. Next,
the extent of details sought in the proposal-cum-needs analysis form is too complex
even for some of the aware consumers to fi ll. I made a valiant attempt to fi ll the seven-page document in which the fi rst six sought several financial and personal details.
Take for instance a question like ‘Are you politically exposed?’ I see little value that an insurer will derive from this response to arrive at the mortality risk I carry. There are uncomfortable personal details sought like liabilities, expected inheritance, future income and expenditure for the next 10 years! The past decade has seen such an
economic boom that any prediction on the future would have been off the mark.
Equally baffling is the column on expected returns from the policy;is it risk transfer or investment that we are looking at? If it is the latter, it is no more insurance.
I don’t think anyone will have easy access to his/ her existing savings and investment details, forget The proposed draft is based on the premise that a prospective buyer will declare all the information the insurer seeks.
The approach is towards financial planning than figuring insurance needs. Will this mean that the Insurance Regulatory Development Authority (IRDA) will certify agents
and distributors to qualify as financial planners to sell insurance? It is unlikely for an agent to manage all the details listed in the form, which is why the draft guideline provides a leeway to them by not binding them with the details being sought.
According to the guideline, if the prospect refuses to provide information as sought by the insurer, agent or broker; the latter shall certify such refusal on the proposal-cum-needs analysis form. Many agents will use this lacuna and not get the form filled completely, leading to mis-selling on record.
But will the form need to be filled by online buyers, and how will telecalling intermediaries handle the form? Overall, I find the move completely fl awed. This procedure is likely to work in societies with a high financial literacy. We are far from such finesse in data gathering, analysis and maintenance. My worry is also about the misuse of the data that I share with the insurer as it can compromise my financial safety. This issue is far more complicated than the UID project if it is enforced in its current form.
Lastly, if standardisation of the proposal form is allowed; it will do away with the USP that each insurer has. Unlike tax forms, which can be standardised; life insurance is a customised solution that can be tailored to suit the needs of a prospect. Moreover,the experience of the advisor comes into play when suggesting insurance plans. By adopting a template product-matrix to suit customer needs, IRDA is assuming the limitations in an agent’s ability to suggest the right policy to a client. And if the insurer has nothing that fits the prospect’s needs? It is unlikely that an agent will suggest the client to buy one from a competitor.

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The Problem of Plenty

Allowing agents to sell insurance plans of multiple players will only
result in increased mis-selling and greater pain for the consumer

Having been in the insurance business for several years now, I get intrigued every
time I hear someone smart mention: Insurance is sold and never bought. The legal nature of the insurance business is such that insurance is solicited, which means that the insurer approaches the prospect to buy insurance.

However, over the years, this has resulted in several unsolicited practices by the agents’ sales force, which have earned them the sobriquet of being rogue agents. (That’s how an article in a recent issue of The Economist described them, discrediting the entire industry and its functioning.) In a bizarre move, the Insurance Regulatory and Development Authority (IRDA) chairman has gone on record to suggest the possibility of agents hawking policies of more than gone company in the life insurance business, which has all the makings of further tarnishing the image of agents.

The current dubious ways of agents are well-documented and any effort to curtail this menace has not been sincerely undertaken by either the insurers or the regulator. In the past 10 years since the sector opened up, the quality of the agent force has not seen any improvement, which is desired of a developing market. Take, for instance, the case of the West, where alternate channels have almost wiped out direct agents, empowering buyers to decide than being cornered into making a decision.
By allowing agents to sell policies of more than one insurer, the regulator will be letting accountability take a backseat. Agents represent an insurer and have their interests linked to products that have incentives embedded in them, making them
sell policies that may not be best suited for the client. The role of training the agent will further get diluted because each insurer will pass the buck on to the other for not adequately training agents. The buyer’s experience will only worsen.
The role of insurance brokers will also get unclear because, unlike agents, they represent the policyholder and act in his interests by advising him on the policy that best suits his requirements.
Brokers are accountable as they need to maintain capital requirements to get licences and it is in their interest to sell policies that address the policyholder’s interest to grow their business. The regulator should bring in accountability among agents and encourage other forms of sales channels, so that buying insurance is a pleasant respect for buyers and not an arduous task. For this, it can take cues from several other industries that were agent-dominated.
For instance, the retail industry has managed to make shopping pleasurable by offering plenty of choices to consumers. Or, for that matter, the airline ticketing business has almost completely ended its dependence on middlemen, thereby ending variable pricing of tickets and bringing in greater transparency. By bringing multi-brand products under one roof, large-format grocery stores have enabled consumers to choose the products
they want instead of buying what is available at the local kirana.
It is time insurance companies helped agents transform from being a ‘product pusher’ to a solutions provider, which is possibly the only natural way to address mis-selling and inculcate the right selling approach. Research shows that a satisfied customer spreads the good word to seven more people. That’s barely anything when you compare it to what an unhappy customer does: he talks about his experiences, with exaggerations, to four times that number. The wisdom is in focusing on quality.

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At a Crossroads

Lack of standardisation of policies is the biggest challenge that health
insurance portability will face when it comes into effect on 1 October

A few years ago, there was a lot of hue and cry over the need for a new identity card if one were to invest in the stock markets.The Securities and Exchange Board of India (Sebi) had come up with an identity card called Mapin, stipulating that investors carrying out transactions of over `1 lakh need to have this unique identity and without it they would not be allowed to transact.

I had some clients rushing in, obviously in a state of panic, carrying forms and asking for details about where to get this identity card made. I adopted a simple, wait and- watch approach that paid off when you look at those who rushed to get the card made because the new card neither found any takers,
nor was it of any use. With health insurance portability around the corner, some of my clients have been rushing in, asking which insurer they should shift to. We are tuned to assume that something new is bound to be good, and rarely do we realise the old adage—a known devil is better than an unknown angel. While I have been an early
adopter of new products and services, I would wait before giving my verdict on health insurance portability. In its current form, it is like the Indian cricket team—very strong on paper. But,the English summer tells a very different tale. The biggest challenge that portability faces is the lack of standardisation in policies, which paves the way for transfer among unequals. Suppose a person who is insured with company X has a `2-lakh policy with `50,000 cumulative bonus and he decides to shift to insurer Y. Will he get a cover for `2.5 lakh or `2 lakh with `50,000 accrued bonus? What if insurer Y has no policy for a cover lower

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Insuring the Insurer

IRDA’s move to protect insurers’ interests gives policyholders no option
to exit pension schemes or shop for higher annuities

Our films reflect our lives and society and, in recent times, many films have been inspired by real-life incidents. In his time, Ajit was a dreaded villain on screen who also laced his dialogues with mannerisms that induced an element of comic relief. A famous Ajit joke comes to mind when he instructs his sidekick Robert about giving out a novel punishment to a fellow: “Robert, isko liquid oxygen mein daal do! Liquid issay jeenay nahi dega, oxygen issay marne nahi dega!” (Put him in liquid oxygen. Liquid will not let him live and oxygen will not let him die). The Insurance Regulatory and Development Authority’s (IRDA) recent move is something akin to that; policyholders will not be able to exit their pension plan and will also be made to live th the annuity offered by the same insurer.


The insurance regulator realised the folly of enforcing a minimum 4.5 per cent return on pension plans, which linked to the reverse repo rate and was 50 basis points higher. The insurers did not realise that the change in interest rates within a year would result in repo rate going up to 7 per cent and, hence, the guarantee going up to 7.5 per cent, and benefit policyholders. To mitigate what it had done, the regulator has done away with the guarantee and has asked insurers to guarantee capital. It is shocking to see the regulator take sides with the industry and not address policyholder concerns, especially when many would have bought the policies for the guaranteed returns they promised. If this was not enough, the regulator, in the new unit-linked pension plans, has ensured that policyholders are trapped with the policy for eternity.

First, there is no exit clause in the guideline and the only exit is either on death of the policyholder or vesting age, which restricts the scope of the product. Next, instead of allowing policyholders a choice of opting for annuity from any annuity provider on vesting, IRDA has forced them to take whatever their insurer ffers.
This protects the interest of the insurers and not that of the policyholder and is against the spirit of competition. If one compares it with the New Pension System (NPS), which has stipulated an exit age which forces accountholders to stay invested in a pension plan with insurance plans, it is incorrect. Unlike the NPS, which offers hardly any incentive to those who sell it, the incentives for insurance agents to sell pension plans is sizeable.

I am afraid that not only will people be mis-sold this plan, they will also have no exit recourse. It has been almost 10 years since the insurance sector opened and, by now, the regulator should have been involved with the regulatory aspects and not development aspects of the industry. This guideline reflects a strong move to strengthen and ensure the insurance companies that have lost business owing to new Ulip charges and find a line of business to keep their operations going.I agree that it is human to err, but I find no reason to punish policyholders, who do not have the expertise to spot traps when investing their life savings in a product that they think will help them during their retirement.

Pension plans are long-term contracts and the impact of even a few basis points’ swing can make or break someone’s retirement corpus. I would rather the regulator
take the cue from Hindi films, where despite all the turns and tribulations the hero always comes out a winner. The regulator should seriously reconsider these anomalies and come with a strong guideline in the interest of the policyholder.

insuring the insurer 05.10.11

Ambition vs Reality

IRDA’s latest proposals are in line with the times, but how effective will they be?

policies. It will also help insurers save on distribution cost and effi ciently manage
complaints levelled against them. I say ‘expected’ because, going by past experiences, I am not too sure how much these proposals will actually get implemented in a manner that will help consumers and insurers. Having issued guidelines for creating the insurance repositories and electronic issuance of policies, IRDA is just a few steps away from creating another entity that it will grant licence to and regulate, thus  yet .another layer of regulations creating.
Myopic View. Dematerialisation (demat) means holding an investment in an electronic form. When two depositories, National Securities Depository (NSDL) and Central  Depository Services (India) (CDSL), collectively hold and manage all demat accounts in the country, why does IRDA want to create a separate insurance repository? When the New Pension System was being formulated, it used an existing depository to function as the central record-keeping agency rather than create a new one.

It seems IRDA wants to maintain an upper hand in controlling every aspect of the insurance business without realising that this could be regressive. Unlike mutual funds and shares, which have product homogeneity, life insurance policies come in various hues; there are pure risk plans, endowment plans and pension plans, besides others. The terms and conditions vary across products and insurers, which mean all policy aspects need to be brought under a single system of the repository.

IRDA needs to address these issues before making announcements that catch the fancy of insurers and consumers who only feel let down. As it is, health insurance portability is to come into effect from 1 July 2011 and insurers and policyholders alike are grappling with how to implement the ruling.

On the issue of what the consumer should do in distress, by advertising about the grievance redressal helpline and website, IRDA is again moving far from the reality—there are plenty of policyholders who are in the rural areas with no access to the
telephone or the Internet. They are also unlikely to be financially literate enough to know their rights.
The existing role of the insurance ombudsmen also comes as a disappointment, which makes me wonder how realistic IRDA’s grand plans are. Perhaps IRDA has to go back to what Peter Drucker said 45 years ago: “There is only one valid definition of business purpose: to create a customer. Markets are not created by God, nature, or economic forces, but by the people who manage a business.” IRDA should step back and empower the stakeholders, who, in their own interests, will work towards the interest of the consumer and profit from it

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Greater Accountability

Health insurance portability is a paradigm shift that can lead to a universal model

With the introduction of health insurance portability from 1 July this year, the sector will transform into a new world where individuals, and not groups, become the decision makers. In essence, from a group insurance driven business model, health insurance companies will go retail, which will give the insured choices and put him at the centre of attention. This giant leap can bring in a lot of structural changes and order to the otherwise chaotic health insurance business.

This announcement is yet another initiative by the Insurance Regulatory and Development Authority (IRDA) to develop the sector. The move will benefit the consumers as much as it will benefit the insurers. Consumers can hope for a lot from this development.
Finally armed with a choice, the policyholder does not have to suffer arm-twisting by insurers into continuing his policies at the fear of losing the waiting period if he moves to a new insurer. This also forced several policyholders to silently keep paying higher premiums because the insurer raised the rates during the policy’s tenure.


There are more potential benefits: like motor insurance, where the no-claims bonus is transferred, health plans may also allow carrying forward such benefits including pre-existing clauses. The option will allow employees moving jobs to carry forward their insurance cover and, maybe, even a conversion to an individual plan. However, in all this excitement, there is a possibility of the insurer declining a customer with an existing insurer.

As for insurers, this move will fuel competition among them and they will need to improve their offerings, pricing and service standards if they wish to match the consumer’s mood swings. But, what is paramount for insurers with this move is the possibility of working towards standardisation of costs incurred on treatments. This will bring in accountability and insurers will get more transparent about costs.

The move is also likely to see the inclusion of more activities within its fold than outsourcing, especially toward claims settlement. This will also impact third-party administrators (TPAs), given the way they handle claims. Inspired by the American
Health Insurance Portability and Accountability Act (HIPAA), the regulator’s move is a step in the right direction that can also be dovetailed into creating a universal healthcare system.
Portability will help in maintaining healthcare records in an electronic format to the advantage of both the insured and the insurer. But systems need to be incorporated to keep a check on frauds and to guarantee patient record security. There is nothing more terrifying than someone gaining access to your healthcare information, leading to misuse since as healthcare records are sensitive information.

Despite all these positives, my fear is about the enforcement of portability. After all, the proof of the pudding is in its eating. Insurers are not obligated to accept policyholders seeking to shift to a new insurer. This may go against the spirit of portability. One will have to wait for the regulator to come up with some guidelines to make this happen. Else, portability will exist only on paper.

Also, it will cost money to make all the systems portability- compliant. All the extra paperwork needed to make the ecosystem of insurers, TPAs, hospitals and the insured portable compliant will incur some expenses. In the short run, it may create new jobs and ruffle up the existing hospital set-ups with systems and procedures on standardisation. Overall, portability is a move that will see some turbulence in the market, but it is for the better.

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Government role is a must in curbing mis-selling of insurance.

-Swami Sharma

© 2019 Swami Sharma