Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

FM will have a golden moment to end financial repression

There is clearly a clean-up needed in India's life insurance market

As I sit down to write this, a letter comes to my desk. Handwritten by a 90-year-old man, the letter seeks help from Mint’s insurance expert in resolving a fraud carried out by an insurance company agent who sold a policy for his grand-daughter, changing her status from a US citizen to a non-resident Indian and promising returns in dollars. It is the same old story again, of being lied to and being sold a policy that is very different from the one promised verbally. Stories of fraudulently sold policies are pervasive—one does not have to go very far to hear them. While nobody goes on record, every conversation with insurance sector insiders—be it with a chief executive officer, senior management or lower staff—confirms that there is a fire raging in the life insurance market due to very sharp sales practices to sell products that are huge value destroyers for the households. The average return on traditional life insurance products is in the 2-4% range per year over a 10-15-year period. Build in inflation and you get value destruction. First-year commissions are as high as 120% of the first-year premium, leading to predatory sales practices that would be called criminal in any mature market. Insurance professionals also confirm that nowhere else in the world do such value destroying products still exist. And they agree that mis-selling, lying and downright fraud are all used to push sales.

What makes prevention of life insurance fraud and mis-selling such a tough regulatory battle? The answer to this leads us to a perpetually hungry-for-funds government. And that brings me to the point that it’s not often that a finance minister (FM) gets a golden moment to carry out deep reform. Such a moment will arrive in the course of the next few years and this writer is hoping that the FM is able to seize the opportunity.

The problem is this: Indian household savings have been used to give cheap funds to the government to finance its deficit through banks and insurance companies. The stock of life insurance premiums invested in central government securities stood at 5.1 trillion for the year ended 31 March 2013. Another 10 trillion is invested in “state government and approved investments".

To keep the flow of cheap money coming, regulations have been created to facilitate mis-selling, fraud and hit and run. We are looking at a regulatory failure of a large magnitude. There are a few questions the FM could ask the insurance regulator. One, why are insurance products’ returns advertised and communicated as a percentage of the sum assured and not investment? Isn’t that deliberate misleading of investors? Companies advertise 11-13% per annum returns. The fine print says returns are on sum assured. How many finance ministry officials can do the math to convert insurance brochures into meaningful investment information? When we did the return on investment math on these products, we get an average annual return that’s no more than 2-4%. Why does the regulator not change the way product features are communicated?

Two, what is the retention of business of the life insurance industry? The FM should ask for the policy lapsation numbers after one, two, three, four and five years after policy sale. The numbers will show that some insurers are unable to keep more than half their business after one year, and lose more than three-fourths of their business after five years. If the person who bought the long-term policy, understood the product, why would she lapse it and lose all her money after 1-2 years? Indian investors have already lost over 1.5 trillion (http://bit.ly/1uzOarS) due to mis-sold life products for a 7-year period ended 2011-12. The FM could ask the regulator why he has turned over a regulation made by his predecessor that mandated a persistence metric of 50% (which would have risen to 75%) for renewal of agent licence. Now companies can fix their own metric! Three, why has the insurance regulator lowered the bar for agents to clear the exam that qualifies them to sell these complicated products? There are more questions: why can’t consumers compare insurance products online, and access public ratings by third-party experts?

There is clearly a clean-up needed in India’s life insurance market. The reason that previous FMs did nothing about it was the need for cheap household funds. But, the fiscal is already looking better with a lucky confluence of global events such as the turning of the commodity cycle and falling oil and gold prices. The stock market is just done inflation-adjusting its return number and the real growth lies ahead on the back of the uptick in the economy that looks imminent. This will make disinvestment viable and further add to the government coffers. The golden moment will come when economic growth gives tax collection—both direct and indirect—a sustainable boost to government revenue.

The FM will have two choices when the country’s finances begin to look better. Splurge on useless populist schemes or solve the problem of financial repression. The second one will put more money in the pockets of the people and pave the way for financial inclusion that will mean not just banking, but life and health insurance and a financialization of investments. Cosmetic attempts at financial inclusion without undoing financial repression will always fail.

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

Close