The fact that life insurance policies are prone to mis-selling is now a well-documented fact, and with a fat commission structure that’s also front-loaded, intermediaries selling these plans have very little to lose. There are many shades to a mis-sell—sometimes customers don’t understand the policy well and the agent is unable to explain the nuances, given the overly complicated structure of insurance-cum-savings plans, sometimes the agents deliberately mislead the customers into buying the wrong plan and sometimes the sale is an outright fraud.

But in all these instances, it’s the customers that end up with the wrong end of the stick, given the high surrender costs in some of the bundled insurance plans—they lose if they stay on and even when they opt out because they end up paying a heavy surrender penalty. On the other hand, intermediaries, who get to pocket a fat commission, rarely suffer. However, there are moments of reckoning for them too.

For Nitin Balchandani, who was a customer service manager with ICICI Prudential Life Insurance Co. Ltd based in Udaipur, this moment came in 2012 when, sickened by the alleged complaints that emerged from his company’s push to sell, he quit his job. He went on to file a public interest litigation (PIL) in 2018, where he listed out specific instances of alleged mis-selling. These include cases where poor farmers from around Udaipur approached the bank for a Kisan Credit Card (KCC) but were sold bundled traditional insurance plans; cases of signature forgery on proposal forms; manipulation of age and income of senior citizens; and sales to people below the poverty line or to students who could not otherwise be sold insurance as per the company’s guidelines.

“A farmer who took a 5 lakh loan from the bank was told that only 3 lakh could be disbursed. The balance 2 lakh had to be kept in the form of a fixed deposit (FD)," alleged Balchandani. “However in reality, the amount taken from the farmer went towards the issuance of a life insurance policy. The next year, the farmer was asked to pay another 2 lakh premium or risk complete forfeiture," he added. Since the money was parked in a traditional insurance policy, surrendering the plan after a year meant the policyholder, the farmer in this case, wouldn’t get any money back. Traditional plans come with very high surrender costs, which continue through the tenure, and could go up to 100% at the beginning.

Upset by the alleged sales practices, Balchandani quit the company to set up a firm, Insurance Angels, to take up mis-selling claims on behalf of customers. While mis-selling is rampant in the industry, a bulk of Balchandani’s customers are from his previous employer. He usually charges a percentage of the amount recovered. “The amount is only taken after the money is actually recovered and is entirely voluntary for the person whose case I have taken up," said Balchandani.

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While Balchandani crossed over to the other side to champion the cause of aggrieved customers of bundled plans, in his previous avatar as a customer service manager, Balchandani wasn’t completely above board. A person with knowledge of the matter, who spoke to Mint on the condition of anonymity, said that Balchandani had indulged in the practice of assigning policies to himself while he was still an employee at the company. Assignment refers to transfer of insurance benefits from one person to another. According to Balchandani, he had assigned two unit-linked insurance plans (Ulips) to himself as he was bullish on the performance of the funds the Ulips were tied to. “I paid the customers the surrender value and took the policies in my name, as did 30 other employees in Rajasthan (there may have been a lot more pan India). I was not fired because of it and nor were the other employees involved," he said.

“The practice of stranger-owned life insurance is discouraged, by the regulator, due to lack of insurance interest. This can lead to all sorts of malpractices," said Kapil Mehta, co-founder, SecureNow.in.

While Balchandani may not have paid a price for assigning of policies, he did pay a price as a whistle-blower. After he quit the company in July 2012, he started fighting alleged mis-selling by helping aggrieved customers fight the battle. In October 2016, he was sent to jail for a month in a case filed against him by ICICI Prudential Life Insurance on grounds of cheating and data theft. That case was quashed by the Rajasthan High Court on 16 January 2018.

An ICICI Prudential Life Insurance spokesperson said, in an email to Mint, that the company has a defined whistle-blower policy. “The purpose of the policy is to encourage employees to report matters without the risk of subsequent victimisation, discrimination or disadvantage."

Subsequently, Balchandani registered another FIR in February 2018 against various officials of ICICI Prudential Life Insurance for criminal defamation and giving false evidence in their original case against Balchandani. This ultimately led to the issuance of a bailable warrant last month against the defendants, including Sandeep Bakhshi, then managing director and chief executive officer of ICICI Prudential Life Insurance and present MD and CEO of ICICI Bank. Balchandani also filed a PIL in December 2018 in the Rajasthan High Court, listing out the details of alleged mis-selling ICICI Prudential Life Insurance indulged in along with its bancassurance partner ICICI Bank in Rajasthan.

The PIL also draws attention to the pressure within banks to meet third-party targets such as sale of insurance policies. “We would like to inform that there are no specific targets assigned to branches for solicitation of life insurance policies," said a spokesperson from ICICI Bank in an email to Mint.

Balchandani claims to have handled around 400 mis-selling cases over the past four years. “In more than 90% of the cases, the insurer accepted the mis-selling claim and refunded the money," he claimed. In response to our query about the alleged mis-selling in Rajasthan, ICICI Prudential Life Insurance’s spokesperson said that during the period from April 2016 to September 2019, the company met with customers in certain pockets of Rajasthan through a combination of proactive visits and over 50 service camps to help resolve customer grievances.

“The two important customer service metrics of persistency and grievance ratio have improved over the years. For FY19, the 13th month persistency of 86.2% is one of the highest in the industry. The grievance ratio in FY19 of 72 grievances per 10,000 retail policies issued in FY19 is well below the private industry average of 83 grievances per 10,000 retail policies issued," said the spokesperson. Persistency is the percentage of policies out of the total policies sold which are continued by the customer beyond specified points of time.

The big picture

Balchandani has taken on the battle head on, but the incident exposes the cracks in insurance regulations with regard to sales practices that continue to allow a front-loaded commission structure. While the previous regulations hard-coded the remuneration structure to intermediaries, the Insurance Laws (Amendment) Act, 2015, gave enough freedom to the insurance regulator to revisit insurance commissions. While other investment products in the financial industry encourage trail model for incentives, the new regulations on commission continued with the front-loaded structure (read more about it here: bit.ly/2MtGjim).

In the case of Ulips, where the surrender costs have been reduced to a bare minimum and the overall charges have been capped, commissions have by default taken a beating. However, traditional plans continue with hefty surrender penalties, and commissions are still high. “Depending on the premium paying term, insurers can pay 15% to 35% of the first-year premium in the form of commissions for regular paying policies," said Mahavir Chopra, director, health, life and travel insurance, Coverfox. “Traditional policies continue to have high margins and commissions," he added. “80% of the policies that are mis-sold are endowment policies," said Balchandani.

While ICICI Prudential Life Insurance may have seen mis-selling of its traditional plans, the company has less than 10% exposure to these plans. In fact, Bakhshi wasn’t a fan of traditional products. In an interview to Mint, Bakhshi had pointed to the heavy surrender charges that stood to harm policyholders (read the interview here). An ICICI Bank spokesperson told Mint that the bank has stopped selling traditional bundled products for the last two years.

Front-end commission structure coupled with complex insurance products that obfuscate customer understanding is at the heart of mis-selling. According to Chopra, aggressive revenue targets without strong sales processes and controls that require need-based selling are contributing factors as well.

It is for this reason that despite regulatory reforms, the insurance industry has not been able to improve persistency of customer by a huge margin. According to the FY18 figures reported by the Insurance Regulatory and Development Authority of India on persistency, insurance companies, on average, were able to retain less than 70% of the policies. Compare this against the global average of close to 90%. Further, by the fifth year, this average dropped to around 35%.

“Insurance products should allow customers to get out of a policy with low surrender charges. Also, at the time of sale, returns from a policy should be explained very clearly and this means the benefit illustration should carry the net yield, particularly for traditional plans. Lastly the commission could be evenly distributed as in non-life products," said Mehta.

Time and again, there have been instances of grave mis-selling in the insurance industry that necessitates a serious relook at product structure and front-loaded commissions. The insurance regulation has some checks in place, the latest being market conduct guidelines that emphasises on suitability-based sales. However, that may not be enough. More disclosures at the time of sale, and a review of incentives for intermediaries is the need of the hour.

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