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3 PrizeWinnerShriRaghavJain,BirlaInstituteofManagementTechnology

MissellinginInsuranceandhowtopreventit

1.Missellingataglance

Bydefinition,missellingmeanssellingaproductbygivingawrongpictureofaproduct,it
may include, giving wrong information, giving unrealistic information, not giving full
informationabouttheproduct.Youmusthaveheardaninsured,sayingbutthiswasnotI
askedfor.And,youragentaccusing,butthenIdidmentionedallthedetailsupfront,didntI?
Insuranceisabusinessofsellingcommitmentsandhereisacasewherethiswasbroken.
Unfortunatelytheproductwasmissold.Missellingisnotuniquetoinsuranceandhappens
invariouslinesofbusinesses(loans,creditcards,investmentproducts,pharmacy,hospitality
etc.),butInsurancebeinganintangibleservicetheprincipleofCaveatemptorprevailsin
insurance.

Often,theintermediarydoesnotfullyexplainthepolicydetailstothecustomer.Orthebuyer
(insured)isinahurryanddoesn'tcaretocheckthefineprint.Therehavebeencasesreported
wheretheagentdeliberatelymisguidedthebuyer.Discussinganexampleofmisselling:A
personaged54,havingahandsomeamountofsavingswithhimandhavingnodependents
(nokidsandwifehaspassedawayafewyearsago),hasnoneedofaterminsurance(death
benefit)buttheagentmaysellhimthispolicy.

Acommonpracticethatisseeninthisregardiswheretheagentsellsthepolicypromisinga
single premium mode or a limited term policy but it actually turns out to be a regular
premiummode.Andthecustomerhasnooptionbuttosurrenderthepolicyorstoppayingthe
premium.AccordingtoasurveyconductedbyErnst&Young,comparedtodifferenttypesof
frauds, insurance companies are most affected by misselling due to premeditated
fabricationorfraudulentmisrepresentationofmaterialfacts.Insurancecontinuestobemis
soldwithseniorcitizensbeingthesoftesttargetsastheydonotunderstandnewproducts.

Figure1.Differenttypesoffraudaffecting
insurancecompanies.
Source:Ernst&YoungReportonFrauds
inInsurance.
2.Missellinganditsconsequences

Lapsation

Lapsationhasbeenoneofthemajorconcernsforinsurancecompanies.Generally,oncethe
policyisacceptedinlifeinsurance,theinsurerundergoescostsforadministrativeprocesses,
agentscommissionandmedicalcharges,whichmanytimeseatupalmostwholethefirst
yearspremiumcollectedaswellasthemajorpartofsecondyearpremium.Afterincurring
theseexpensesifthereisanearlylapseinthepolicythenitposesamajorfinancialthreatto
theinsurer.Amajorreasonforlapsedpoliciesisthelackofcommunicationbetweenthe
insuredandinsurerafterthesaleofpolicy,leadingtostrainedrelationships.

IRDAsannualreportrevealedthatin201011,policyholderssurrenderedpoliciesworthRs.
76,712crores,morethandoubletheamount(Rs.36,225crores)inthepreviousfinancial
year.Alsothetotalnumberofinsurancepoliciesbothpublicandprivate,thatlapsedduring
FY201011stoodat1.40crores,withanassuredsumofRs.1.58lakhcroresasagainst1.23
crorespoliciesinthepreviousfiscal.Therewere2,189complaintsofmissellingregistered
withIRDAduringthesameperiod.

CognitiveDissonance

Oftenthemisalignmentintheobjectivesofthepartiesinvolvedtriggers misselling.For
example,insuredsmajorobjectivemaybetosavetaxesorbuiltacorpusratherthanlife
protectionwhereastheagentmaybelookingatearninghighercommissionsandhelpinghim
reachhistargetfaster.Thismisalignmentattheinitialstageofpolicyitselfmaycauseahuge
divide at later stages. In case ofinsurance, cognitive dissonance will cause a previously
cheatedcustomertonevertrustaninsuranceagentagain,howevergoodthepolicymaybe.

Badwordofmouth

Theindustryisfacingtheriskofbadpublicityduetomisselling.Thereareinstanceswhen
peopledeclineinsurancepoliciesjustbecauseofbadpublicitybyfriends,relativesetcasthey
losefaithinit.

3.FactorsleadingtoMisselling

Thevariousfactorscanbebroadlyclassifiedas:

Productrelatedissues

Thecomplexityoftheinsuranceproductandasymmetryofinformationbetweentheinsured
andinsurerorhisagenthasledtoaminefieldofmisselling.Alsothepolicydocumentisfull
ofjargonsandfineprintswhichmakeitbeyondthecomprehensiveabilityoftheinsuredto
interpret the real meaning. This leads to controversies between the policyholder and the
insurer.
 Aggressivemarketing

Theinsuranceproductsarepromotedaggressivelybythecompaniesandtheagentshaveno
optionbuttosellitbyhookorcrook.Often,theyshowaperformancecharttotheproposer
whichshowsastronomicalreturnsof15%overaperiodofoneyear.Manytimescustomers
ofULIPSscomplainthattheyweretoldthattheyneedtopaythepremiumonlyforthree(or
five)yearsandwouldreceiveguaranteedtaxfreereturns,butwhentheychecktheactual
conditionafterthreeyearstheygetshockedtoseethattheirfundhadactuallydiminished.
IRDA has recently brought out many corrective and preventives measures to curb this
problembutitwilltakesometimefortheconsumerstorealizetheconsequences.

Lackofawareness

BeingliterateisnotsufficientforunderstandingtheBFSIproductsbutconsumershavetobe
financiallyliterate.Themajorissuewhichneedsimmediateattentionisfinancialliteracy.
Inasituationwheretheprospectisnotfinanciallysavvy,thereisagreaterprobabilitythatthe
salewouldnotbeneedbased.Peoplearenotawareabouttheirfinancialgoalsandhencethey
arenotabletoanalysetheirneedsandbuyproductswhicharenotintunedwiththem.What
theyendupdoingishelptheagentinachievinghisgoalsratherthantheirs.

Dearthofqualifiedagents

Most agents do not take this profession seriously and end up terminating their agencies
soonerthanlater.Thepoliciessoldbytheseincompetentagentsbecomeorphanpolicies
andwithoutservicingtheylapse.Inthefinancialyear201011,10.45lakhagentsleftthe
insurancebusinesswhileonly7lakhjoinedwhichhasledtoafallof35%.Thecompanies
arefindingitreallyhardtorecruitgoodagents.
*Numberofagentsinlakh**Atthebeginningofthequarter ***duringthequarter
 Source:IRDA

Lackofpatience

Afterthecustomeragreestobuythepolicy,hedoesnotseethepolicyliteraturecarefully.
Theyareinahurrytowrapuptheprocedureandtheydontevenstudythefeaturesproperly.
Theagentnodoubtshouldproduceallthefactscorrectly,buttheinsuredisalsoliableto
checkwhathehaspurchased.Promptinspectioncanleadtoutilizationofthefreelook
periodinabettermanner.

RewardsystemofInsuranceagents

Sinceagentsarepaidheavilyfrontloadedcommissions,theyindulgeinunethicalpractices.It
brings in product bias as an agent has an incentive to recommend a particular product
irrespectiveoftheclientsneed.Thisfactbecamemoreevidentwhentheagentcommissions
forULIPproductswascappedpostSeptember2010IRDAguidelines.Insurancecompanies
havelostalmost21%oftheirbusinessafterthesereforms.

4.Missellinginvariousdistributionchannels

Thepossibilityofmissellingthroughvariousdistributionchannelsareasfollows:

Bancassurance

Bancassurance model has been viewed as the future of the distribution that will help
Insurance to increase its penetration. But there have been various cases of misselling
reportedinthischannelwherethepolicywasforcedtothecustomerinordertoclearaloan.
The customer unwillingly buys the policy in order to get the loan and stops paying the
premiumafteroneyear.ThispracticeisnotgoodfortheindustryandIRDAneedstostrictly
dealwithitasearlyaspossible.

Brokers

Brokersarealsofoundtobecontributingtothismalicebypitchingforpolicieswhichfetch
them higher ticket size. Brokers should act as advisors to the customers and should
recommend them the products which suit them the best as pertheir needs (Need Based
Analysis).Butthereneedstobeachangeinthepayingpatterntobrokerswhichwillsolve
theproblemofmissellingtoagreatextent.Willwegotoadoctorwhoexaminesforfreebut
recommendsbuyingmedicinesonlyfromaparticularcompanyortoadoctorwhochargesa
feebutprovidesthebestpossiblemedicineavailableinthemarket?

Online

Variouswebsiteswhichpresentthemselvesasasourceofexpertknowledgeforcustomersof
insurancetendtogoforcomparisonofvariousplansofferedbydifferentcompanies.Butthey
failtopresenttheirvestedinterestsinrunningthesewebsitesastheysometimescompare
productssayof,healthinsurancecoverprovidedbytwocompanieshavingcompletely
differentattributesjustonthebasisofprice.Thoughinternetisahugesourceofinformation
butitlacksauthenticationaspectsandmanytimesprovetobemisleading.

5.Missellinginotherbusinesses

MutualFunds

MutualFundsareoftenmissold,thishappenswhentheintermediaryrecommendsamutual
fundwithouttheanalysisoftheriskprofileofthecustomer.Hetriestopushthefundwhich
fetcheshimthebestcommission.

PonziSchemes

ThebiggestfinancialfraudofrecenttimeswasbySpeakAsia;aSingaporebasedcompany.
Based on Multilevel Marketing, the company enrolled 1.9 lakh panellists who were
promisedanannualreturnofRs.52000byjustpayingasubscriptionamountofRs.11000.
AccordingtotheMumbaiPolice,thetotalfraudwasasbigasRs.1320crores.

Creditcards

Thecreditcardbusinessisalsofullofmalaiseandtherehavebeennumerousinstanceswhere
cards are been sold without explaining the terms and conditions properly. The customer
realisesthisfactwhenheseesthestatementwithvarioushiddencharges.

6.StepstakenbyIRDAandinsurancecompaniestocurbMisselling

Persistencynorms

Ithasbeenseenthatpersistencyinthelifeinsurancebusinessisonadeclineandthiscanbe
attributedtomisselling.CompaniesarenotabletoretaincustomersandhenceIRDAcame
upwithapersistencynormwhichsaidthatthelicenseoftheagentwillgetcancelledif50%
ofthepoliciessoldbyhimarenotrenewed.Thisisaboldmovebytheregulatoranditwill
ensurethatthepoliciesaresoldonproperadvice.Morestressshouldbelaidoncollectionof
renewalpremiumratherthangeneratingnewbusiness.

Distancemarketingguidelines

IRDAalsocameupwiththedistancemarketingguidelinestoprotectcustomersinterest.The
regulatorhasproposedastandardisedscripttobepreparedbytheinsurerforthesaleof
insurance products through the SMS, Email, Snail mail and telephone. The script will
assimilatekeyproductfeatures,benefits,andallothersolicitations.Allthesaleactivities
shouldstrictlybeinlinewiththescript.AlsoIRDAwantsthecompaniestorecordevery
conversationcall.MoreovernowlifeinsurancecompaniesarenotallowedtosellULIPs
with annual premiums exceeding Rs. 50,000 for nonsingle premium policies and Rs.
1,00,000forsinglepremiumpolicesorvariableinsuranceproducts(VIPs)viatelemarketing.
 OnlineGrievanceManagementPortal

WiththelaunchofIGMS(InsuranceGrievanceManagementSystem)portalandcallcenters,
anaggrievedcustomercanescalatehiscomplainttoIRDAincasetheinsurerisnoableto
resolvethegrievance.IGMSprovidesacommonbasetoallinsurancecompaniestoresolve
policyholderissues.

RegulationsforWebAggregators

InNovember11,IRDAcameupwithsomerestrictionsforthewebaggregatorswhichdonot
allowthemtocompareproducts.Thesewebsitespushproductsonwhichtheyreceivehigh
commissionsfromtheinsurancecompaniesandoftentheprospectlandsupmakingwrong
choice. Under the new guidelines, which come into effect from 1 February 2012, the
commissionwhichtheyreceivehasbeencappedandtheyhavebeenbannedfromreviewing
andratingproducts.

CustomerCentricInitiatives

Manycompanieshavestartedtakingcustomercentricmeasurestoeradicatethisproblemlike
makingwelcomecalls,inwhichtheinsuredisagainbriefedontheproductfeaturesand
chargesinvolvedtoensurethathehastakenanlearneddecisionwhilebuyingthepolicy.
HDFCStandardlifealsocameupwiththeirinitiativeMostImportantDocument(MID),a
questionnairetoensurethatcustomersunderstandtheproductwellbeforemakingadecision
topurchaseit.

7.Solutionswhichareworkable

RegulatorySolutions

1- IRDA should consider the Swarup committees recommendation of phased

eliminationoftheagentsupfrontcommission.Itcallsforafeebasedadvisedsystemandit
cantakecuesfromcountrieslikeAustraliainthisregards.

2- Thequalificationlimitfortheagentsshouldberaisedatleastforthoseintheurbanareas.
Presently,aHighSchoolpasscanbecomeaninsuranceagentwhomaylacktherequired
competency.

3- IRDAshouldclearlydemarcateorencompasstheroleofanagentwiththatofa
financial advisor. Many agents today, are selling policies under the name of financial
planners.

4- IRDAshoulddesignamodeltopunishheavilythepeoplewhoareinvolvedinmis
sellingandencourageincentivesforthosewhoarediscardingsuchmalpractices.
IndustrySolutions
1- Draftingproductliteratureinvernacularlanguageswhichwillbeeasierforalaymanto
understandanditwillalsowidenthereach.Thetermsandconditions,benefits,charges,lock
inperiodetcshouldbespecifiedinboldandsimplelanguage.

2-Agentsarethefaceoftheindustryanditisthebestinterestofthecompaniestocollaborate
anddevisesuperiortrainingprogrammesforagents/advisorsthatcanreducemisselling.

3-Whentheapplicationfortheinsuranceisunderprocess,theunderwritershouldcontactthe
customerandelicitresponsefromhimregardingtheproductwhichhasbeensoldtohim.He
shouldalsoensurethatthecustomerhasboughtwhathehasintendedtobuy.

4- StrengtheningtheITandprovideriskprofilingsoftwarestothesalesforcetopromote
needbasedselling.InVietnam,InsurershavedevelopedanAgentManagementProgram
which crosschecks agent names with policy sales. The software tracks three year
performanceofagentsandtheyarefirediffoundindulginginillicitoperationsandthey
wouldnotberecruitedbyanotherinsurancecompanyfornextthreeyears.

5- Companiesshouldsimplifytheirtermsandconditionstoremoveanyhiddenmeaningsor
terms.Theyshouldtakethisasapartoftheircorporategovernancetofinanciallyeducatethe
insured.

6- Theinterestofthedistributorandthecustomerneedstobealignedbyremuneratinghim
throughoutthetermofthepolicyratherthanheavilypayingfrontloadedcommissions.This
willforcetheagentstosellproductswithlongtermperspectiveandwillensureproperpolicy
servicing.

Conclusion

This problem ofmisselling can only beeradicated bythe combined efforts ofInsurers,
Regulators,IntermediariesandCustomersaswell.Lapsesonanyoneofthefrontwillallow
thismalicetomanifestitsuglyheadagain.

***

References

InsuranceRegulatoryDevelopmentAuthority(IRDA)AnnualReport,20102011

InsuranceRegulatoryDevelopmentAuthority(IRDA)Journal,May2011
FraudsinInsuranceonRiseSurvey(Ernst&Young),20102011at
http://www.ey.com/Publication/vwLUAssets/Fraud_in_insurance_on_rise/$FILE/Fraud
_in_insurance.pdf
MissellingintheUK(OliverWyman),October2011at
https://web.actuaries.ie/sites/default/files/event/2011/07/111020%20ERM%20Forum%20
%20Daniel%20Mikkelsen.pdf

HDFCLifeIntroducesMostImportantDocumentforcustomersBusinessStandard,
th
14 April,2011athttp://www.businessstandard.com/india/news/hdfclife
introducesmostimportantdocumentforcustomers/432228/

th
MinefieldofMisselling,TheTimesofIndia,26 December,2011,at
http://timesofindia.indiatimes.com/business/indiabusiness/Minefieldofmis
selling/articleshow/11249543.cms