That distrust is damaging because insurance helps households recover financially from death, disability, illness or natural and man-made calamities. It is the bedrock of any sound financial plan. The life insurance industry’s advertisement “Sabse pehle Insurance” (insurance before anything else, including investments) is absolutely right for pure protection insurance.
The Insurance Regulatory and Development Authority of India (Irdai) acknowledges several reasons for this distrust in its path-breaking consultation paper on distribution reforms. “Interests of insurers, distributors and public are misaligned. ... However, prevailing remuneration structures place greater emphasis on premium procurement rather than suitability or persistency or long-term customer outcomes.” “Sales are commission led instead of pricing and quality led.” “High cost and uncertain service quality is weakening trust and limiting coverage.” These are the restrained words of the industry regulator, not an industry critic.
The paper rightly calls distribution reforms a “compelling priority”. They include bringing back commission limits and gradually lowering the expenses insurers can charge policyholders. The paper also seeks to simplify how insurance is sold, set up Bima Sugam as a not-for-profit insurance marketplace, and promote informational transparency through a Public Insurance Registry (PIR).
Predictably, industry players have protested. They seek to protect the status quo, especially on distribution commissions. They argue that the reforms will affect the employment of lakhs of agents. That argument does not wash. Employment cannot justify misleading and exploiting millions of fellow citizens.
The Irdai chairman has said that the voice of the public is missing when insurance regulations are made. The industry is heard well. Policyholders are not. This column will try to fill that gap. Here are four suggestions to put policyholders first, even if industry pressure stalls the commission reforms.
First, change the measure of success. The job of insurance is to protect. Yet the insurance industry measures penetration as the premium collected as a percentage of GDP. This is like measuring progress on a journey by the amount paid for petrol instead of the distance covered. If petrol becomes expensive, it cannot be celebrated as progress. Measure the protection amount per person instead. That would refocus the industry on its core function.
Second, launch Bima Sugam without further delay. It should offer simple term and health insurance products at prices with no commission built in. This would let consumers compare prices and decide whether an agent’s service is worth the extra cost. The “direct” plan model in mutual funds is a useful parallel. Direct plans now account for about 45 per cent of mutual fund assets, just 13 years after their introduction. These have helped moderate commissions by bringing in transparency and competition. Bima Sugam can do the same for insurance.
Third, allow fee-only insurance advisers, much like investment advisers in the securities market. Paid by clients alone, these advisers would receive no commissions from insurers. They would have a duty to put their clients’ interests first. This would give consumers access to independent advice on the insurance they need.
Fourth, add complaint records and the decisions on them to the proposed Public Insurance Registry. Consumers should be able to check these easily before choosing an insurer or intermediary. It would be especially useful in health insurance, where claim denial is routine. It would help consumers make better choices until Irdai brings suitable reforms for that sector.
Truth be told, the tariff man may dominate the headlines for the next few years. However, the immediate association of life insurance with “mis-selling” and health insurance with “claim denied” will take much longer to fade. Trust will come as policyholders see claims paid and policies sold honestly. Irdai’s reforms, together with these suggestions, can begin that process. Only when the industry earns that trust can “Insurance liya accha kiya” mean what it says. ____________________________________________________________________________________________________ The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta
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