Mis-selling: Irda moots cancelling licence of agents

With many life insurers not able to retain customers due to mis-selling, the regulator Irda has proposed that licence of an agent be cancelled if 50 per cent of the policies sold by him/her are not renewed annually.

"Where average annual persistency ratio is less than 50 per cent, the agency licence would not be renewed," Insurance Regulatory and Development Authority (Irda) said in a draft. Mis-selling refers to sale of a financial instrument without fully disclosing the pros and cons of it to an investor.

In its proposal on persistency of life policies, Irda says the minimum first-year premium income to be procured by an agent will be Rs 1,50,000 per annum and the minimum number of policies per agent shall be 20 per annum. In case an agent fails to meet one of these two conditions, he will have to achieve proportionately more in the other norm to make up for the shortfall, it added.

It also does not want spouses and close relatives of employees of insurers as agents.

In the last five years, persistency in the life insurance business has been on the decline, it says and has attributed this mainly to mis-selling. Persistency is the percentage of business retained without lapsing or being surrendered.

"There are several causes for the decline in persistency that are linked to agents. The primary one is mis-selling," Irda says.
    
The Irda data show that over 50 per cent policies of many life insurers could not be renewed in FY10. Aviva Life could not retain 50 per cent of its business from existing customers from the 13th month onwards in 2009-10, while HDFC Standard Life, ING Vysya Life and Kotak Mahindra was below the half-way mark from 37th month onwards in renewal of policies that year.
    
Irda says if policyholders buy policies on the basis of good and proper advice, they would not normally give them up unless there are unforeseen circumstances.

"But where a policy has been sold without proper advice, for instance on the actual cost or installments to be paid, they may have no option but to cease or reduce the premium," Irda says.
    
Irda suggests that insurers would have to ensure that intermediaries are trained well to ensure proper servicing of policyholders. It also wants a part of an agent's first-year commission be withheld to be paid later on good persistency.
    
It says the corporate agents route, excluding banking medium, has shown the poorest persistency rates in the first three policy years. "This indicates a scope to improve the quality of sales. However, again, to observe stable trends we would need data of a few more years," it adds.
   
Another cause of lapse linked to agents is high attrition. "Where agents are groomed to become professionals and build a long-term career,attrition will be less and persistency would certainly be better.It is necessary to have an environment where agents take their career seriously," says the paper.
    
Irda has asked various stakeholders and general public to submit their comments on these proposals by July 31.
   
It says these proposals would help protect the interests of policyholders."Due to selective withdrawals, lapses,average mortality of remaining policyholders will make premiums insufficient to cover the risk," it said.