Home / Opinion / The genius in simplicity

If the past couple of years have been about sweeping changes that made life insurance products more customer friendly, 2013 was sort of a grand finale to changes in product structure and incentive alignment. In February, the Insurance Regulatory and Development Authority (Irda) came out with final guidelines on products with a deadline of 1 October. But insurance companies, especially the giant Life Insurance Corp. of India, were not able to file their reworked products on time and the deadline was extended to 1 January 2014.

These key changes that benefit users are: a minimum life insurance cover is mandatory in life insurance products; agent’s commission is now linked to the premium-paying term to make insurance a long-term investment, and, most importantly, the surrender charge (the penalty that insurers impose if you leave the insurance policy midway) has been reduced. In a way, the burden of mis-selling has shifted from the policyholder to the insurer because a low surrender charge means insurers can’t recover their costs if policyholders quit midway.

Of course, mis-selling ails all financial products that are sold by unqualified distributors or those interested in pocketing incentives alone. But in life insurance, the impact has probably been the most. In a study done earlier this year we found that policyholders lost as much as 1.5 trillion in seven years primarily due to mis-selling. Read it here: https://goo.gl/X0u46I. Finance minister P. Chidambaram has acknowledged the fact and has asked insurers to have simple products.

The changes mandated by Irda are meant to plug mis-selling, but the danger remains because insurance products continue to be complex and misleading. A case in point is the new regulations-compliant guaranteed insurance policies. These policies promise paybacks at attractive rates, but these rates are pegged to the sum assured or the death benefit. Read about it here: https://goo.gl/mt79gE. The brochure showcases returns at 8% or 13% of the sum assured, but it does not talk about your return on investment. For an average investor who invests in products such as Employees’ Provident Fund, Public Provident Fund or fixed deposit, there is only one figure to deal with and that’s the return on investment. So, it’s probable that this investor may mistake the 8% comeback to mean the return on investment. This would be a big mistake because in most of these policies, the return on investment is just about 4%. Moreover, it’s illogical for a product that guarantees investment benefits to not publish return on investment. And, yet, insurance rules don’t mandate this.

Although there is still some ground to be covered in insurance products, Irda is beginning to shift focus on expanding distribution. Three changes that took place this year testify to that: guidelines on banks becoming insurance brokers; the pass percentage for agents in pre-recruitment examination being lowered from 50% to 35%; and the draft guidelines on allowing web aggregators to solicit insurance policies.

The first of these is a win-win proposition: insurers will be able to tap the huge network of banks, and customers will be able to place faith in insurance advice from these brokers. As of now, banks, as corporate agents, represent the interest of the insurer and are allowed to sell products of only one insurer. But as brokers they will be able to sell products of multiple insurers. Not only that, as brokers they also become answerable to the customer for the advice they give.

The banking regulator, Reserve Bank of India (RBI) has also come out with its own draft guidelines in November on banks becoming insurance brokers. Going a step further, the government issued a circular this month asking all public sector banks to become insurance brokers by 15 January 2014.

Mint Money likes the broking model, but it shouldn’t be done in haste. The ground has to be readied before this can be implemented. The two key things that need to happen are manpower training, and a shift to simple products so that banks can handle product ranges of multiple insurers.

The other changes in the distribution space may be counterproductive. Lowering the pass percentage for agent licences would only dent the quality at the hands of quantity. Allowing Web aggregators to solicit insurance policies will improve distribution, but may hurt consumer interest. These aggregators are essentially websites that enable comparison across insurance products. This help customers find appropriate plans and also encourage market competition. But the draft guidelines allow them to solicit business so that they are able to convert customer visits into sales. I use these sites often, but the problem now that they ask for contact details before allowing me to compare products. Also, soon after being on the website, I start getting calls nudging me to buy a policy. This defeats the whole purpose of a web aggregator whose job is to offer comparison.

Insurance products are complex and opening up distribution without quality checks and monitoring can backfire. Instead of looking at ways to expand distribution, the industry should focus on making products simple, customer experience pleasant and penalties on wrongdoers stringent. The launch of e-insurance account, which digitizes all insurance policies in one place online, and the Integrated Grievance Mechanism System were huge steps forward. Hopefully, in 2014, too, we will see more customer-centric changes.

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