How much insurance do you need?

To curb mis-selling, Irda had proposed need-based analysis, but little seems to have changed on the ground

Don't be surprised if an insurance agent asks you for details like what is likely to be your future income in the next five years and when do you plan to buy the first house or car and so on... Sounds almost like a management interview. Based on this information, the agent or broker will be able to better suggest a policy suited for you.

In February, the Insurance Regulatory and Development Authority (Irda) had envisaged freeing the insurance sector from mis-selling through draft guidelines. However, things have not changed much.

Earlier this year, Sandeep Ghosh, chief executive officer of Bharti AXA Life Insurance had said there was a need for this (financial need-based analysis) in the industry but not necessarily in the format suggested by the regulator.

The devil dies in the details: The need analysis form (a 15-pager) would require the agent to collect the customer's personal details, know his risk appetite and financial goals and then suggest one or more policies suited to him. The agent will then give product details to the customer, its benefits and the various charges applicable.

It is an excellent methodology, if adopted earnestly. However, there are execution problems. First, a 15-page form asking for crucial details cannot be filled in a hurry. Therefore, most potential policyholders are most likely to give basic details to the sales agent and ask him to fill the form. Those who will try to take the form home to fill it at ease are likely to face resistance from the sales agent. So, in either case, need-based analysis is not happening and mis-selling is going to continue.

Next, if the priority of the sales agent is to only sell the form, how can one be sure that he is selling one best suited to the buyer? You never know. Therefore, mis-selling will continue.

Even if we assume that an agent is duty-bound and will make his customers fill the need analysis form diligently, how can the customer be sure that he will still not sell a wrong plan, that is, one shelling out better commission.

“You can never be very sure,” says a broker. “Many companies are looking at this platform to push unit-linked products, which have not been selling,” he adds. The added incentive is that the regulator recently, increased commissions on unit-linked products to at par with traditional ones, that is, 15 per cent, up from seven per cent.

As G N Agarwal, chief actuary of Future Generali Life Insurance points out, this step will be more beneficial for aware citizens and those who are in the know of agent mischiefs. And, let’s face it, how many potential policyholders know about all the norms brought out. Not many. Therefore, mis-selling cannot be curbed completely.

So, in all likelihood a 25-year-old will continue to be sold a debt product (that is endowment) and a 50-year-old will be sold a unit-linked equity plan. Not much of a choice, is it?