When one lives in a country of over a billion people, big numbers seldom come as a surprise. But when I looked at the number of Rs.1.5 trillion, I was astounded. That’s about 1.5% of the Indian gross domestic product, was the first thought. But the number in the excel sheet looked back with the certainty of coming out of a formula run on actual premium data sourced from the regulator: that’s the money retail investors have lost from mis-sold life insurance policies over seven years. Knowing that the industry will come after this number, as my colleague in this work so graphically put it, with their bazookas, we did the numbers again. And again. And several times again. Checked and re-checked the methodology with insurance industry experts, actuaries and academics. We used another, totally different method to see if we were way off the mark. But the final number refused to back down. Retail investors lost a minimum of Rs.1.5 trillion to the insurance industry and its agents over a period of seven years that ended in the financial year 2011-12. You can read the full story of this lost money that appeared in Mint on 6 February 2013 here: http://bit.ly/X3YJDY.
I’ve followed the life insurance industry and its sharp sales practices for about a decade and I thought few things could now surprise me. A small digression here: the first time I knew that things were really wrong with the industry was about 10 years ago when I looked at a policy brochure and then read it. The fine print said that 70% of the first premium would be deducted as various costs in year one. The frantic calls from agents, who took home Rs.40 on every Rs.100 premium they collected in the first year, suddenly began to make sense. But now, looking at profits of companies fattened on lapsed policy investor money, I find that I underestimated the ability of an insurance company to be unfair. Not only did companies manufacture toxic products, sold them through very large incentives (remember, the Insurance Act specifies the maximum limit for commissions, not the minimum), but once the policyholder let the policy lapse on finding out that it was unsuitable, kept the money with themselves, again imposing the maximum possible cost on the policyholder, and then moved that money over to their profit account. Question them about it and they say that the rules allowed it. They were just following the Insurance Act that allows them to do so after a waiting period of two years. (Why does that comment always remind me of old Shylock (Act 4 Scene 1, The Merchant of Venice) and his quest for his pound of flesh because the law allowed it? And the court upheld it. Well, we know what happened to him.)
What next? One view is that now that the insurance regulator has changed the rules of the game, we should all get on with life. But is that the correct approach? Let’s look at how the industry behaved once the Ulip rules were changed in 2010. It moved to producing and selling traditional plans which still had all the features that made Ulips toxic. The regulator will now change these rules as well to take most of the toxicity out before the end of the current fiscal year. But what does this market behaviour say about the industry? It says that the industry will continue to find loopholes in the rules and will use them to the detriment of the investor. What will make them move from checking regulatory boxes to really looking after the policyholder? It could be the fear of big ticket penalties. We’ve proved that policyholders have lost huge sums of money. We now need the finance minister to put in place a mechanism to get this money disgorged and returned to the policyholder. And a stiff penalty for doing what they did.
The world post-2008 is a different one for the financial sector than the time before. Hiding behind checking regulatory boxes will perhaps not do.
Endnote: Whispers from legal friends tell of high level opinions that are being sought. Who seeks? CEOs of both funds and insurance companies. What do they seek an opinion on? The question they ask is this: does mis-selling by an agent make the principal liable under the Indian Penal Code or not? And if it does, who’s liable? If I were a compliance officer of a mutual fund or the trustee, I’d look very carefully at what’s going on where the buck is travelling to. Not sure where the insurance guys will push it, though.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at email@example.com