Would you buy a policy or a fund on Flipkart or Paytm?

Would you buy an insurance policy or a mutual fund on Flipkart or Amazon or Paytm? While you chew over the question, regulators that watch over these two industries are gearing up to frame regulation that puts in place some rules of the game. The capital market regulator had constituted a committee led by Nandan Nilkeni to work this out six months ago. The Securities and Exchange Board of India (Sebi), it seems, is just a month away from a draft that allows e-wallets to vend funds. The inter-regulatory approvals are currently getting worked out. The insurance regulator uploaded a draft insurance e-commerce regulation on 7 June. You can read it here: http://bit.ly/28KdHMg.

With the aim of reducing cost and increasing access to insurance products, the Insurance Regulatory and Development Authority of India (Irdai) has put out draft regulations that explain the who, what, when and how of e-commerce platforms in selling insurance. According to the draft, agents, intermediaries, insurance companies themselves and others who get a licence (Amazon, Flipkart?) can set up a “Self-Network Platform”, or an online (mobile or any device) shop to sell both life and general insurance policies. Read more details in this story by Deepti Bhaskaran: http://bit.ly/28JLIhy .

The insurance industry is divided over the draft. The positives are that rules of the game in online sales will trigger more enterprise and make access easier. But there is disquiet about much else. The existing online sales industry, which mainly sells commoditised insurance products such as travel, motor, home, health and term life plans, is riled about the need to open an insurance repository (like a demat insurance policy) account for all products sold online. The repository idea of Irdai did not take off, says the industry. There are about 800,000 repository accounts with less than 5 lakh worth of demat policies in them (there are accounts with no policies in them). This, say insiders, is Irdai’s way of forcing the industry to open them. It will kill the market in the short term as it is a clunky and costly exercise.

Others say the draft does nothing for the two big products in life insurance—unit-linked insurance plans (Ulips) and traditional plans. “Ulips are not allowed to sell on the basis of past performance numbers and can give future illustrations on 4% and 8% return. It is absurd to carry forward a traditional insurance return illustration to a market-linked product, why will Ulips sell online?” says one insurance company’s chief executive officer (CEO). Traditional plans, with their opaque structure and unclear benefit proposition, too, will not sell, says another CEO. “Traditional is never going to be a pull product, where is the value proposition?” Anybody who is online and searching for a traditional product will use Google, and know very soon that these are value destroying products. Irdai needs to understand the difference between online sales and e-policy issuance. The draft is more about e-policy issuance than facilitating online sales.

I have three comments on the draft. First, a deeper surgery is needed in life insurance products in India to make them transparent before online sales pick up. Second, Irdai is framing e-platform rules without thinking through its web aggregator rules. Today, insurance web aggregators are like brokers on the web, they make money if they sell. Web aggregators globally are fintech firms that simply compare across products and are not forced into becoming sales platforms. Irdai needs to separate the comparison function from the sales function. There are already plenty of conflict-of-interest stories about the current web aggregators. Three, online sales would trigger a fresh round of fraud in insurance by the established gang of fraudsters that has perfected the art of cheating people using insurance products. Irdai will do well to set up a license holder check on its website so that a customer can enter the name of the website to check if it is indeed registered with Irdai or not.

If available, should you buy financial products on Paytm, Flipkart or Amazon? To understand this better, I spoke to personal finance experts in the UK, the US and Canada to see what they thought. None of these countries allow e-commerce platforms to sell investment-linked financial products yet. “Cost-effective retail access is a good thing and there’s nothing that suggests that a computer will be a worse intermediary than an individual,” says a UK-based expert. Most of them agree that there are two issues holding regulators back—KYC (know-your-customer) and anti-money laundering checks, and the sticky issue of suitability. The KYC issue is getting worked out using Aadhar authentication instead of a wet signature. But suitability is the tough one. A ‘suitable’ sale is one where the seller is not mis-selling a product. But what is to say that an algo sale will not be suitable against an agent-sold product?

The issue is the lack of understanding we have as a market on suitability. Regulators have rules that mandate ‘suitable’ sales but nobody knows the parameters of a suitable product. Regulators need to work together to put in place a set of suitability guidelines across products. A product can be suitable according to a risk capacity and appetite metric, or as per the time horizon, or goal metric. Financial products are not mobile phones that can be returned in 15 days if they don’t perform. These are long-duration, invisible products that need duty of care at the point of sale.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com