The Securities and Exchange Board of India (Sebi) took a big step to infuse trust into India’s retail finance markets in August when it banned mutual funds from charging customers an upfront fee that went, in effect, to pay the middleman. Since the middleman earns his commission from the customer, he has less incentive to mis-sell products.
Yet, this was a half step: Another instrument, called the unit-linked insurance product (Ulip), behaved much like a mutual fund, but still duped the customer. In what appears to be an attempt to complete this circle of trust, Sebi this weekend ordered 14 insurance companies to stop selling Ulips. The capital market regulator has been insisting that because they involve both insurance and market investments, Ulips deserve its scrutiny. The insurance regulator seems to disagree. While the two bodies settle their turf battle, let’s hope they don’t lose sight of the bigger picture.
The regulatory challenge here is not just to bring trust, but also to allow this industry to grow. India is still poorly insured: penetration is around 0.16% of the gross domestic product, against a global average of 2.14%. In fact, who knows, thanks to Ulips, more Indians could now well be aware of insurance as a concept. Companies have been pushing Ulips for the past five years; recent reports suggest this product has now become all the rage in smaller cities.
That hardly recommends Ulips though. As Sebi itself notes, often only 2% of the Ulip’s premium contributes to its insurance cover. What Indians need, then, is better insurance. But they have to be convinced they aren’t being taken for a ride.
After all, customers once bitten are twice shy. Because products such as Ulips often mask transaction costs—40% of the first-year premium goes into commission—agents get unsuspecting customers to switch products after a while. The purchase of a new product obviously means another 40% commission. That explains why Rs1 trillion worth of policies lapsed in 2008-09: Customers shed their policies, only to buy another.
Trust greases the very wheels of finance, and it goes both ways. Investors should be able to trust markets, and markets should be able to translate this trust into profits.
What’s next for India’s insurance industry? Tell us at email@example.com