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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

One step forward, two back

Irda does a volte-face on insurance agents

High costs and mis-selling are two problems that have dogged the life insurance industry for long. But there was a whisper of hope in recent years with tighter regulatory control on the industry. Of course, it didn’t start with introspection but with force—when pushed to a wall, the Insurance Regulatory and Development Authority (Irda) surprised everyone by cleaning up insurance products and their structure. It mandated a minimum insurance cover for all products. There were plans that were pure investment with a negligible sliver of insurance. Irda also capped product costs and reduced the surrender charges to bare minimum, although traditional plans still come with hefty penalties if you quit midway.

The industry panicked and there was a lot of hue and cry initially. But when the dust settled, insurers began to see the long-term merits of a product overhaul.

While there were reforms in products, in distribution and elsewhere, Irda initiated small but effective steps. One such step was introducing the Integrated Grievance Mechanism System (IGMS) through which it can monitor not just complaints redressal by various insurers but also get insights into the nature of the complaints. In fact, it publishes this data, although with a time lag of more than a year, on its consumer website (www.policyholder.gov.in). It comes as no surprise that unfair business practices, poor policy servicing and processing topped the grievance list. This data should have been the starting point for Irda to formulate policies further, but what it’s doing now is jumping the gun.

The next step should have been to improve the quality of the insurance sales force, and then focus on expanding the distribution network. But Irda has jumped to step three before effectively working on step two. A recent Irda circular is a shining example of this: on 12 February, it revoked the criterion of a standard minimum persistency requirement for agents to qualify for licence renewal. In 2011, it had put in place a minimum standard of performance for agents and corporate agents according to which they would need to ensure that at least half of the policies sold by them came up for renewal the next year. In other words, the 13th month persistency needed to be at least 50%.

Life insurance is a long-term contract. Customers benefit by keeping life insurance policies for the long term because they need protection over a period of time. As for the investment component of a policy, meaningful returns come in only after a few years because insurance plans are usually front loaded. For insurers, too, long-term contracts bode well as they are able to recover the entire cost of the policies. So, it was only fair to ask agents to sell policies for the long term to be eligible to renew their licences. In fact, an insurance agent has no business being an agent if she can’t sell an insurance policy right.

The industry was due to march forward with a higher persistency threshold of 75% from the next fiscal when, under its new chairman T.S. Vijayan, who is ex-LIC chief, Irda revoked the criteria altogether and allowed insurers to independently decide the minimum persistency threshold for their agents.

The circular (http://goo.gl/5dh7d4 ) effecting the decision is devoid of any rationale. Poor persistency is a definite outcome of mis-selling and by removing standard quality controls, it’s hard to imagine what Irda is trying to achieve.

The least that the regulator could have done was to give out some data on the impact of the persistency requirement, or why it was okay to give insurers a free hand. The recent regulation also violates the spirit of the forthcoming Indian Financial Code that calls for draft proposals before major regulations are implemented. But from what I hear, Irda’s move is directed towards plugging the mass exodus of agents. In the absence of any clarification from Irda in the circular, this seems quite plausible.

A uniform persistency threshold is important for agents just as cost caps are for insurance products. By allowing insurers to fix their own thresholds, the industry is once again at the risk of degrading sales standards. Not to forget, it also gives insurers the opportunity to book surrender profits.

Globally, the persistency in life insurance policies is around 85%; we are nowhere close to that mark. The focus, therefore, should be on improving the quality of sales so that insurance products are understood both by the seller and the buyer. But from what we see, Irda is channelizing its energies into expanding the distribution network instead—the latest example of this is entities called insurance marketing firms.

Insurers have been told to not interact with the Press on this, but having been privy to a presentation by Irda on such firms, it seems these will be a halfway house between agents and brokers. An insurance marketing firm would be allowed to sell products of multiple insurance companies and other financial products as well, and like insurance agents, it is unlikely to have any fiduciary responsibility towards customers.

Irda’s recent initiatives may take us to to the early years of the industry when the focus was on the first-year premium alone. We have come a long way since and any efforts, deliberate or inadvertent, that take us back should be strongly resisted.

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