CROSS SELLING OF INSURANCE PRODUCTS SHOULD END

S.Harirao

SYNOPSIS:

Recently finance ministry has pulled up Public Sector Banks (PSBs) for mis-selling of insurance products to customers through fraudulent and unethical practices. As per IRDA annual report, the complaints disposed in favour of policy holders is 24% in 2020-21 and 27% in 2021-22.

Department of Financial Services had received complaints that fraudulent and unethical practices were adopted by both Banks and Insurance companies for procuring insurance policies from the Customers.  Central Vigilance Commission (CVC) also raised concerns about the incentives paid to staff members for selling of insurance products to customers of their banks especially that of loan customers where the quality of advances may get compromised for the sake of commission and incentive.

TRACING THE HISTORY:

It all started in the year 2004-05 of selling insurance products of Unit Linked Insurance Plan (ULIP) scheme of insurance companies. A study made on this for the period 2004-05 to 2009-10 indicates that the ULIP policies were sold to the customers and the commission earned would be as high as 40% of first premium. Customers were falsely assured that their investment would be doubled in 3 years and they could withdraw at that time.

But, actually ULIP policy lock-in period is 3 years and the policy holder can withdraw after 3 years. If he/she desires so, only the premium amount paid less hefty commission around 40% will be paid to the customer.  Actually the ULIP scheme is for 10 years period and the policy holder had to pay for 10 years and to reap the benefit he had to wait upto 20 years since the investment had to grow up.

But at the end of 3 years, when the customer realizes that the policy is not suitable to his needs, he withdraws from the scheme incurring heavy loss. Private insurance companies, using this psychological trend of the customers, earned very huge amounts of money.  The rule at that time was that if only one year premium was paid, and not renewed in subsequent years, the insurance company was not obliged to return any amount.  The estimated loss to the customers or policy holders which was the profit to the insurance companies in India was estimated to be around Rs.1,50,000 Crores. (1.5 trillion rupees) over a period of 5 years.

This kind of cheating the policy holders has prompted the financial regulators across the world to protect the consumers through specialized mechanisms. In Australia it is “Future of Financial Advice” initiative in 2013.  In the same year in UK, the Financial Services Authority banned upfront commission for sale of investment products. But in emerging market countries, the knowledge of consumer is limited coupled with weak laws; moreover conventional ways like courts yield lesser results of compensation.

There is a concept of disgorgement through which governments force financial institutions to repay consumers for their loss. An example is that UK, through its Payment Protection Insurance mechanism, made banks pay 10 billion pound sterlings to compensate the customers for the mis-sold insurance policies in 2013.

PRESENT SCENARIO:

It was only private sector banks which were selling the insurance products either of their own subsidiaries or that of the other insurance companies and incentives were paid for selling the insurance products to its employees.  Public Sector Banks belatedly have ventured cross selling insurance products in the name of earning other income.  From the top management down the line, targets were fixed and undue pressure was created. The policies were sold mostly to loan customers who had no other option but to buy the insurance policy as an obligation for getting the loan sanctioned, and the quality of loan gets compromised, not to mention the incentives and trips to exotic places arranged by the insurance companies to the staff who canvassed the insurance products.  There are also incidents of diverting the deposit customers to buy insurance products which may not be suitable to the needs of the customers which will end up in mis-selling and loss  to  customers.

It is a right time that both Finance Ministry and Central Vigilance Commission have come heavily on Public Sector Banks on their unethical and fraudulent tactics of selling insurance products to its customers.  India should emulate the initiatives from the other countries like Australia and UK and should enact strict laws with suitable compensation like disgorgement to the distressed consumers in case of  mis-sold  insurance products.