Financial Safeguard

How Insurance Agents Fool You

NATFIN BUREAU

You may have received a call from insurance agents of some company or the other informing you of about the problems in ULIPs you might be holding. If you get convinced about the kind intentions of this gentleman, he would suggest you to get out of ULIPs and invest in endowment policies instead. If you are inquisitive enough, you would do some ground work to find out the reason for the unusual benevolence of the agent. Also, you would find out that he never told you where your money would be invested or till what time your money would be locked. After you manage to get all these information, you would realize you were basically a pray for the agent whose intention was to simply get you switch you to a plan which would fetch him a fat commission, regardless of your requirement or the inherent weaknesses of the product he was paddling.

You are not alone. There is hardly any person who has not been target of such mis-selling of insurance. And, unlike you, many do walk in the trap of these agents and get saddled with policies that they don’t need or don’t understand. Worse still, many lose money as their premium payment are simply not made in the policy they were promised. Very often, hapless customers simply failed to trace their agents at all.

Problems galore

As per our finance minister, the reason why insurance is stumbling in India is because of mis-selling of products and complex products. The problem of insurance agents fooling hapless investors range from advising unsuitable policies on one hand to outright frauds like taking cheques in own name instead of insurance companies on the other. And the number of such instances is very high. During the financial year 2011-12, the Integrated Grievance Management System (IGMS) facility, set up by IRDA, received a total number of 309,613 complaints for the life insurance industry, of which 308,331 grievances were resolved during the year. Of total complaints received, 257,313 pertained to private life insurers and the rest was for LIC.

Looking at the breakup of the complaints, 32 per cent pertained to unfair business practices, whereas 27 per cent were for delays in proposal processing and 20 per cent complained about delays in policy servicing. Further digging reveals that the biggest problem was about policies sold to customers under false commitment. This is only the reported statistics, not accounting for those who don’t have access to internet or are simply not aware of the facility. The real magnitude of the problem could arguably be much bigger. The menace of mis-selling was also revealed in a study conducted by consulting firm, Ernst & Young on insurance frauds in India. According to this study, product mis-selling accounted for 31 per cent of insurance related frauds, with collusion between parties and fake documentation accounting for 29 per cent and 24 per cent respectively. Whichever way we look at the issue, the problem of mis-selling of insurance and other allied malpractices is rampant.

Many ways to dupe

There is no hard and fast rule or method of hoodwinking an unsuspecting person by agents. But there are some broad patterns which cheatings generally track.

Most discernible category of mis-selling is one in which the agent tries to sell policy that customer actually does not need or one that is not in accordance with customer’s financial goals.

Many persons do not have a sound knowledge about the various insurance policies and their benefits. In this case, they are too dependent on agents for understanding their own need. This makes them sitting ducks for agents who then take them for a ride. Examples of these could be an agent who is trying too hard to sell you ULIP instead of term policy even if you want to keep premium low.

In a related way, the agent sometimes does not hand over the policy documents to the individual on the day he collects the premium or if the customer is not highly literate, gives him the wrong policy document. They also do it to ensure that customer could not read the terms and condition because then he can use the free look clause to rescind the policy within the mandated 15 day period. Once that is passed, the agent can surely get his first year commission, regardless of customer’s problems.

Another huge avenue of misleading customers is through telemarketing, especially in those months of the year when most people are in a hurry to do tax planning. Often tele callers lure customers with grand but wrong promises of high returns and tax benefits. These offers are also sometimes loaded with freebies if policy is purchased within a day or two. For those who are not keen on reading fine prints, this creates proves a powerful bait.

Sometimes, mis-selling takes place from banks with which customers have account. Because banks have specific details of the individuals, they come up with so called customized insurance products that cater “especially” to the needs of the customer. In the end, however, these customers are saddled with products that they don’t need. The insurance agent, however, walks away with a fat commission for these policies.

Major reasons for mis-selling

Lack of awareness on part of customers and poor oversight by insurance companies are the major reasons for such mis-selling by agents. Massive dearth of qualified and educated agents especially in non metro cities and smaller towns adds to the malady tremendously.

The major problem with Indian population is that it has been led to treat insurance as investment instead of a risk protection. This breeds the tendency in agent community to somehow show a huge return on investment. Protection is just a freeby. This attitude is further compounded by the fact that many buy insurance just to save tax.

From companies’ perspective, lack of strict vigil and poor crackdown on erring agents create incentives for agents to paddle unwanted policies. At times, companies are interested in getting the business anyhow, which blunts their intent to act decisively against malpractices. A related issue is that of unrealistic business targets which insurance companies force on agents which in turn, instigates agents to be unethical. But now many insurance companies have started to take this issue seriously, as we would see below.

Finally, there are agent related problems that range from poor quality to moral hazard issues. First of all, the proliferation of insurance services has created a level of agent requirement that is hard to be filled by the rightly qualified agents. This has led to sub-par agents entering the business and generally eroding the quality of insurance selling. Secondly, the incentive structure which is highly skewed in form of front loaded commission, encourages agents to make the first sale sell anyhow, pocket the commission and don’t care for the continuity of policy. This has led to a large number of policy lapses in recent years, mostly because customers find that they actually don’t need the policies that they have. Finally, for many agents, insurance is a part time or stop gap profession. It is not uncommon to find housewives or college graduates to take up insurance business and after a few years, move to another business. That leads a massive lack of commitment and increases possibility that they would dupe customers.

How are insurers coping?

Many insurance companies are now setting up processes to tackle this menace. For example, Max Life Insurance as set in place process of “Mystery Shopping”, though which external agencies are hired to randomly call agents, posing as a customer, to check if they are following the correct procedure or are indulging in mis-selling. Birla Sun Life pre-sales has a concept of pre-issuance verification call where in customer service team calls up customers whenever advisor logs the policy. These practices have started to show results in form of reduction of complaints, but there is still a lot required to be done to eradicate the menace.

What can customers do?

All said, it is ultimately the customer who is conned, harassed and duped. As such, it is he who has to be most vigilant so that no unscrupulous agent sells him what he does not need or runs away with his money. So, before he signs up the cheque for the premium payment, he should make sure that he is buying what he really needs. Insurance is a long term engagement and as such careful assessment of not only the product is required, but also of the person paddling the product. Discussing requirement with more than one advisor is a good idea. So is reading about the terms and conditions of the policy one decides to buy. It definitely requires some investment of time, but it would save you lot of headache later on. Also, it is preferable to check the credentials of the agent. One should insist on agent’s identity and IRDA registration details. Further, the nearest branch of the insurer can be contacted to find if the agent is genuine or has been barred. After buying the policy, records should be kept straight.

Finally, one should be very careful about any loan that may have been taken against policy. If loan has been taken and repaid is should be reflected in records. However, if loan is not taken but shows in records, immediate action is require and company must be contacted to ensure someone has not forged documents to take loan. Most important of all, one should never jump to buy insurance just to save tax. Insurance is a protection against a mishap, it must not be confused with an investment vehicle.