After Outlook Money got wind that insurance was being sold through multi-level marketing, or MLM, outfits, it checked out four companies that, reportedly, were using that model. We hit pay dirt on the first call. Then, in one form or the other, even the other three companies we contacted said essentially the same thing: “You need to make further members and every time your ‘downline’ grows, you get an incentive. Also, you don’t have to pass an exam or undergo an agent’s training.”
The companies are spread across the country: TLC Insurance (India) in Bangalore, RMP Infotec in Chennai, Golden Trust Financial Services in Kolkata and SecureLIFE out of New Delhi. All four claim to be selling policies of various insurance companies such as Bajaj Allianz, Max New York Life, Reliance Life Insurance, Life Insurance Corp. of India and Kotak Mahindra Life Insurance.
Also see: How the MLM chain functions
If you bought a cover, you would become an “agent”, no questions asked. You would then be eligible to hire more “agents” and get a cut of the commission for each policy sold by you, your “agents”, or their “agents”. This would continue as long as the pyramid kept growing. Eventually, not only would you recover the cost of your policy, but also stand to make a stash. While some companies limited the number of people you could have directly under you to two, others were less fussy. According to unconfirmed estimates by industry insiders, the total volume of business generated by MLM companies is now worth around Rs5,000 crore (since 2002), or about 6% of the total life insurance business generated in this period, and growing. Just the premiums collected last year total Rs1,000 crore, according to industry estimates.
The Insurance Act, 1938, and the 2002 regulations of Irda define the business structure for corporate agents— companies that have a licence to sell policies. Typically, corporate agencies have a fairly simple and flat structure. The company in question gets the agent’s licence. It then employs “specified persons”, who must pass a test conducted by Irda to qualify to sell insurance. These people work for salaries and get incentives, usually depending on the business they generate. While the Irda regulations allow companies to become corporate agents and directly employ specified persons to canvass and sell policies, it specifically bans specified persons from employing any sub-agents.
The problems with MLM
Some MLM companies have licences from insurers to function as their corporate agents, a model that was introduced in 2002. Gary Bennett, managing director, Max New York Life says: “The corporate agent is a concept introduced with a view to taking advantage of the presence of a large number of firms, corporations, banks, non-government organizations, cooperative societies and panchayats, which are in contact with people in the normal discharge of their activities and utilize their presence and services for canvassing the sale of insurance contracts.”
The MLM model does not conform to the Insurance Act and Irda guidelines on a number of counts. The first is the creation of a pyramid of agents. According to Rajesh Relan, managing director, MetLife India Insurance Company, “Section 41 of the Insurance Act says a licensed agent, whether individual or corporate, can’t appoint a sub-agent and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating (or discounting) and is prohibited under the Act.”
Also see: Rules thrown to the wind
Some corporate agents using the MLM model can contend that there are no sub-agents and what they are following is a system of referral that is allowed by the rules. However, a referral remains so only if the referee is paid irrespective of whether there is a sale or not. Otherwise, it is likely to be a sub-agent relationship with the corporate agent. Since “agents” in the MLM framework earn after they have “sold” a policy, these are clearly not referrals. It is essentially discounting that corporate agents are resorting to.
It was to check rampant mis-selling by sub-agents of corporate agents that, in 2005, Irda decided that the “specified persons” who were selling insurance policies had to pass a qualifying test. In the MLM model, the only thing one has to do to qualify to sell policies is buy one of them oneself. The practice cocks a snook at Irda’s test system. S.B. Mathur, secretary general, Life Insurance Council, says: “The MLM model is not banned by the regulator. It bans the unlicensed sale of insurance policies, which is mostly done by exploiting the MLM channel.”
The Insurance Act also says those not directly involved in selling a policy should not get any part of the commission. In the MLM model, an “agent” gets a cut if another “agent” in the pyramid of which he is the apex sells a policy.
What’s on the ground
Even though the rules governing the industry make it impossible for a corporate agent to use the MLM model, the practice seems to be alive and well. Take the case of Kolkata-based Golden Trust Financial Services. Its representative told Outlook Money: “The company gives 8.5% of the commission to ‘agents’ selling a policy and a 3% commission if an agent below them sells a policy. Every member acts as a sub-agent.”
Also see: Call: GTF, Kolkata
Industry insiders allege that at least some insurers are aware of what’s going on. While we have no proof of that, there seem to be some lapses in monitoring corporate agents. According to Irda’s 2005 norms, corporate agents have to submit all sales support material such as prospectuses, sales brochures, sales illustrations and publicity write-ups for approval to the insurer. But, so far, nobody seems to have done anything about the ones that seem to be blatantly advertising the sales of insurance policies through MLM networks.
TLC Insurance, which distributes Bajaj Allianz products, on its website, www.tlcnet.in, invites you to become a “TLC co-ordinator”, for which you have to buy a policy for at least Rs5,000.
It then asks you to “sponsor a pair and tail and get Rs600 for each pair.”
That is the beginning of your very own MLM chain.
(Illustrations: Jayachandran / Mint; Graphics: Sandeep Bhatnagar / Mint)