Expert Take – IRDA’s Latest Rules an Attempt to Clean Up Bancassurance

Will the insurance regulator’s tightening of rules under which banks sell insurance change anything much?
Insurance regulator IRDA says that banks are going to be liable for the insurance policies that they sell. Just as importantly, IRDA wants recording of, and access to, the actual bank employee responsible for each insurance policy sale.

Of course, it will come as a surprise to ordinary people who have been at the receiving end of banks’ hardsell that this isn’t the case so far. However, this is basically a dance around the meaning of the word `liable’ that is typical of the complex regulations around insurance.

In the official terminology, insurance can be sold either by agents of insurance companies or by independent insurance brokers. Agents represent one particular insurance company while brokers can sell policies of many.In the sense above agents are not `liable’ for what they do, but the insurance company that they represent is. Up till now, banks have acted as corporate agents of a single insurance company. An actual policy sale could be done by any one or many bank employees but the identity and conduct of that person was an internal matter of the bank.

Now, IRDA wants to regulate this whole process. This accompanies new regulations that will allow each bank to tie up with up to three life, non-life and health insurance companies. According to what the IRDA chief has said that the regulator would want it to be recorded of who was the actual person who conducted the policy sale and would want access to all this data.

The idea seems to be that this would make mis-selling less likely because the salespeople would be trackable and the bank liable.Do you find this convincing? I don’t, and I doubt anyone who is familiar with banks’ insurance sales business would do so.

This idea is based on the belief that the bank employees who sell insurance are the culprits behind all the hard sell and the misselling while the banks themselves (at an institutional level) have their policies and priorities right. In reality, nothing could be further from the truth. The employees’ hardsell and misselling is exactly as the banks themselves are driving it.

For better or for worse, customers trust banks. This trust is bestowed upon them by the simple fact that they are permitted to call themselves banks. They then turn around and abuse this trust and have specially done so on a vast scale in the matter of selling insurance. It very much remains to be seen whether IRDA’s focus on the actual employee, or its shifting of liability to banks will actually have any effect. Unless IRDA makes a serious effort at proactively detecting misselling and then handing out exemplary punishment that seriously squeezes the bank where it hurts, nothing much will change.

Actually, the heart of the problem lies even deeper. To a customer who doesn’t have adequate life cover, selling any kind of insurance scheme except plain term insurance should be recognised as mis-selling. As a general rule of thumb, one should have at least ten years’ income as life cov er. But if you try to do that as part of ULIPs or traditional insurance plans, you will find that even paying your entire income as premium will not suffice.

The result is that after close to two decades since insurance privatisation started, no one is willing to talk about whether it has improved the quantum and rate of actual life cover that Indians have.

If anyone is really serious about forcing the insurance industry to do its primary job -give life cover to people -here’s a simple idea. Make it illegal to sell any non-term policy to anyone who does not already have at least ten years’ income’s worth of term insurance. The ten year’s income must be based on income tax returns (say, the last two or three years’ average) rather than a self-declaration. This way, insurance companies and their agents will still sell unsuitable policies, but at least it will limit the damage that they do to their customer’s finances.

Source: Economic Times

Date: 05-10-2015

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