Six years ago, I became a life insurance agent. As a journalist writing a story on the quality of agents’ training and licensing, this was the only way to get a first person account (I was working in another newspaper at that time). An agent from a private life insurance company, who came to sell me a unit-linked insurance policy (Ulip), assuring double-digit returns, helped me since he was a couple of new recruits away to a holiday in the hills.
His aspiration for a free family trip was also his bait for me and that’s how I was introduced to this professional title: life insurance agent. The job: sell as many policies as you can, meet the targets and get free gifts over and above the commission that is rightfully yours. And what do you do to deserve that money? Nothing. Really, nothing. I did not sit through the 100 hours of mandatory training before the exam because this agent helped me fudge my attendance. And when I cleared my exam, I did not go for any product training. Yet, soon after, I was swamped with SMSes of new policies to sell and target figures to meet. I would also receive SMSes promising added incentives such as trips to exotic destinations.
Obviously, I didn’t sell any policy because this exercise was part of a story to unearth how the masses were being lured into becoming agents and my licence with no business written against my name expired soon after. But the experience really described the people who got almost 40% of the policyholders’ money for selling policies they perhaps themselves do not understand. It also exposed the environment in which the distribution landscape existed and continues to exist even now to a large extent. Lack of training, front-loaded incentives and no accountability transformed most insurance agents to con artists, who left a trail of unhappy investors. Seeing through the hard-sell much later, these investors simply refused to fund the policy any further and losing much of their investments in the bargain.
But for an industry that depends on a continuous stream of premium income, also known as renewal premiums, it is disconcerting to see complete apathy to the malaise in their distribution system. A good look at the products that were built like investor traps and the puzzle begins to unravel itself; you start understanding why despite such high rates of customer dissatisfaction and lapsation, insurers have made profits and reported double-digit business growth consistently.
As a rookie reporter some six years back, I would meet a lot of agents posing as an interested customer to get a sense of how Ulips were sold. It’s true that Ulips were sold as a three-year product, promising double-digit return in a short span of time, but one such instance is worth mentioning. A bank representative while dishing out the benefits of a Ulip handed me the brochure. A quick glance at the cost told me that the insurer would keep 70% of my money as premium allocation charge in the first year and if I surrendered the policy after the first year, I would get nothing back. Yet for the bank representative, a three-year horizon was good enough for a double-digit return.
This explains why insurers did not raise an alarm in the face of high lapsation rates and why agents continued mis-selling. Fat charges in the policy ensured they were able to recover most of their costs and high lapsation only translated into profits for the companies. So while the agent made his money from the sale of policies and the insurers made profits out of lapsation, you and me became the losers. Yes, we were sold these policies as a money-doubling vehicle, but we are responsible, too, for falling into such traps. We buy them in the last-minute rush to save taxes or we simply don’t read through the brochures to understand the product, when we can if we take the trouble to do so. But the mis-selling engulfed the investments of even those who are simply not equipped to understand the intricacies of a bundled financial product.
But it’s not just the product structure and distribution that have eroded trust in the industry and let the problem of mis-selling persist for so long. It is also the lack of right data. For an industry that is regulated and yet is reeling under rampant mis-selling, it is quite astonishing to know that there is no data on how much the investors have lost. The government has also taken note of this and thinks it is deliberate on the part of the insurer to not give out data on how much investors lost. Mint Money struggled with the information at hand to arrive at an estimate of how much the investors lost in the last seven years. So if the industry collected Rs.3.7 trillion worth of premiums from the sale of fresh regular premium policies in the last seven years, we the investors lost Rs.1.56 trillion.
So far the insurance regulator has attacked the roots of the problem. Surrender charges are capped and costs have been contained so that there is an automatic focus on the persistency of a policy. And that will happen if the policies are sold for the right reason. But we still need to cover more ground. As rightly pointed out by an industry veteran, we should ask why did the insurers move the lapsed money to their profit and loss account when it belonged to the policyholders? Another pertinent question is how can we get justice for the people who have lost their money to insurance mis-selling.