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Home / Opinion / India staring at another insurance-linked scam

The mails, SMSes, tweets are all growing in number. The calls are getting more persistent and sometimes border on the aggressive. We are sitting on another huge insurance-linked scam, but this time it has crossed the line from mere very sharp mis-selling to downright fraud. If you’ve not got a call from a person pretending to be from the insurance regulator or an insurance company offering to either move you to another, more lucrative policy or to get you your bonus that was declared recently, you either live outside India or have managed to keep your number out of the dragnet of the hundreds of illegal call centres that carry out this fraud.

This is how it works. The caller identifies herself as someone from the regulator who wants to help you move from a rotten product to a government-guaranteed one. For this you have to surrender your policy and write a new cheque towards the new policy. The company name is bonafide. You bite the bait. And that’s the last you see of your money or the ‘agent’.

The other variant is that the caller offers to help you get the bonus that was declared. It is the old Nigerian scam at work. Offer a large reward and then ask the bakra to pay a small amount to get this money out. You pay. And then it’s all over.

On pulling the thread of this scam I found this story. It began with banks beginning to sell insurance through the bankassurance model some years back. With no rules around suitability or any regulatory action on mis-selling by branches, the hardsell of insurance was learnt and honed in the branches. Some of the sellers realized the potential of doing this on their own and stepped out to set up their own sales agencies—either as illegal call centres or as brokers. It seems there are brokers who do business worth 400-500 crore a year specializing in such sales.

Why do they do it? Because the first year commission goes as high as 120%. But aren’t commissions capped at 30% for brokers? Yes, they are, but companies find ways to overcome this limit by padding up costs. For example, an insurer could take a desk on rent in the broker’s office and pay a monthly rent of 2 lakh for the desk. Multiply that with 1,000 pan-India offices and it has handed over a cheque of 240 crore a year to the broker. It could put up a hoarding in the broker’s office and pay 1 lakh a month as ‘rent’ for this. Identify non-auditable activities such as pamphlet distribution and bill crores for it.

So are companies complicit? Of course, how else would the known names in the market keep getting away with sheer fraudulent sales? Why do the companies do it? To get topline numbers and to enjoy lapsation profits. Or the appropriation of premium if the policy holder fails to renew within the lock-in period.

How do you catch it? Look at the death of business between the policy getting logged with the company and getting issued. If there are many policy deaths in this time, it is a red flag about the kind of business coming in. Look at consumer complaints. Data from the Insurance Regulatory and Development Authority (Irda) show the rise in ‘unfair business practice’ complaints—these have more than doubled over two years ending 2013-14. Three, look at the 13th month persistency.

A policy can be hard-sold or sold through fraud but in such cases the second premium does not come. This policy ‘lapses’ and the 13th month persistency number drops. A 13th month persistency of 80% means that 80% of the business got renewed. Any broker with a persistency of 30-40% is a huge red flag. Why doesn’t the regulator look at these metrics and take action? And now here’s the strange thing. On 11 February 2014, Irda did away with a minimum persistency metric of 50% for renewal of agency licence. It was to rise to 75% in the current financial year (http://goo.gl/CbV8rR). Each company can now fix their own persistency metric! No wonder that the 13th month persistency for some companies is as low as 50% (to get the data is no easy task—Irda does not report it in a consolidated form and you have to trawl the public disclosure of each company to get the data.)

The root of the problem? The endowment and money-back policies that bundle a crust of life cover with an investment product with an average annual return of no more than 4% over 10-15 years, is the biggest value destruction machine in the Indian market today. By taking out public notices against mis-selling and lowering the bar for the industry (the pass percentage for insurance agents is now 35%, down from 50%), Irda is signalling which way the industry should go.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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