The way life insurance is manufactured and sold in India is much like a trap, with regulators, companies, sellers and ombudsmen all colluding to defraud households of their money. The trap works like this: you have a bank that you’ve banked with for years. There is trust. The bank has a relationship manager. This manager pitches a product to you. He may do so because he sees a balance that is investible or a sudden inflow of retirement money or a bonus or some other lump sum. But a product is pitched. The pitch is verbal. The merits of buying this product are explained in great detail. Brochures are shown, numbers are circled, final return values are discussed. Words like ‘mutual fund with free insurance’ and ‘guarantee’ are commonly used. You trust your bank. You believe the manager and say yes. Thirty seconds later the money is transferred to the product—the paperwork will happen. We’ll fill the forms and you just sign. Because you trust your bank, you agree. The policy documents come after the money has been invested, you try and read, but they are so complicated that you get on with your life. It was your banker who sold you the product and he said, ‘We’re there for you. Don’t worry.’ You believed him.
Now one of two things can happen. You find out after a year that the product you bought is not the one that was described to you. Or, you complete the term of the product, like 72-year-old V.P. Kapoor did, five years after he had invested in what he thought was a mutual fund with some free insurance. (See story ‘How to shrink Rs.50,000 to Rs.248’). And, find to your blood chilling horror, that you have been had. Your money is mostly gone. Kapoor found that Rs.50,000 invested in a ‘growth’ fund had evaporated and just a residue of Rs.248 was left after five years. Or, you find that what you thought was a one-time investment is actually a 15-year annual commitment. (See this for more details: http://goo.gl/PQCB7U ). It is a very different manager that you encounter now. He simply says that you have to talk to the insurance company; he is just the banker. What can he do? You begin writing, mailing, talking to the company. You get a standard response—you signed the document, you knew what you were doing. You complain to the regulator. He says the same thing. In addition, you get put on a guilt trip—‘we gave you a 15-day free-look period, why did you not use it? Your fault.’ You go to the banking ombudsman. After a lot of paper work and time wasted, you get told the same thing. ‘You signed. You should have read the document.’ The trap is complete with all the parties colluding.
But Kapoor decided to protest. He retired as a scientist. How could he have been fooled like this? His fight resulted in a writ petition to the Allahabad High Court, and the erudite court has broken the closed loop of regulators, insurance companies, banks and ombudsmen. Para 42 in the court order is worth quoting in full:
“Once this matter in which the investment of a senior citizen of Rs.50,000 has been reduced to Rs.248 in five years, by a Corporation, which is owned and controlled by the Statutory Corporation, acting in breach of the Irda Regulations has come to our notice, we find it appropriate to issue a direction to the Irda to critically examine each and every policy of the SBI Life. If it finds that the SBI Life, which has suffered penalties in the past, for its defaults has acted in breach of its guidelines it would be appropriate for it to direct the SBI Life to discontinue its policies and to wind up its business. The Central Government will do well to ensure that the investors are not cheated in a manner as in the present case, in which the entire investment of the senior citizen has been lost on the pretext of the policy being in tune with Irda guidelines. The ‘Serious Fraud’, Department of Ministry of Corporate Affairs must examine these policies and unlawful gains made by the Company and its Directors including the Directors of SBI, in the Company, by cheating the policyholders on the pretext that its policies are in compliance with Irda regulations.”
Irda is the Insurance Regulatory and Development Authority, which has oversight of the insurance industry.
The court finds the company guilty. It finds the regulator sleeping at the wheel, if not actively colluding with the company. The court wants the central government to ensure that investors are not cheated. But here the court is expecting the impossible. We must remember that the government feeds off this cheap money collected by 40 million new insurance policies each year. In just one year (2012-13), over Rs.4.4 trillion was invested by life insurance companies in central government securities. The story isn’t over yet. I’m sure the case will come to a higher court. And that will be another battle.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at firstname.lastname@example.org