New Delhi: Finance minister P. Chidambaram couldn’t have been more spot-on when he spoke this week about what’s hurting the insurance industry’s growth in India.
“In my view, the reason why insurance is stumbling in India is because of mis-selling of products and complex products,” Chidambaram said in a public speech on Monday, reported by PTI. “If you want to sell insurance to India, you must sell simple products and must make it absolutely clear to agents and other officers that they should not mis-sell.”
Policyholders in urban India, where few buyers of insurance can claim they don’t have a rip-off story to tell, would know exactly what Chidambaram meant.
It’s a phenomenon that goes back to the first decade of privatization, when an around three-million-strong sales force, which took home up to 40% of the first-year premium as commission, sold life insurance products that were built like investor traps.
Complicit in this were life insurance companies that stood to benefit because of very high surrender charges (charges levied by the insurers when an investor stops paying premiums midway), as investors let policies lapse when they discovered that the policies were unsuitable.
According to a Goldman Sachs report, profits from the lapsed policies were enough not only to wipe out losses in some companies, but actually show profits at the aggregate.
The other group to benefit was the sellers of these products—agency commissions for the period 2004-05 to 2011-12 totalled Rs.1.13 trillion.
The mis-selling of life insurance products in the decade after the 2000 privatization is a textbook case of poor regulation and mis-managing the transition from a state monopoly to free markets. So big became the public uproar over the predatory sales of life insurance products that the regulator, in July 2010, was forced to step in and change the rules around the product being mis-sold—the unit-linked insurance plan (Ulip). But the damage had been done. Ulips, almost single handedly, have caused a deep erosion of investors’ money and confidence in the markets.
vinay mohanty
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