The solution is so simple you wonder why no one thought of it. The Swarup committee’s report on investor protection and awareness has recommended eliminating commissions on life insurance premiums. If implemented, the commissions on all types of policies will initially be capped at 15% of the premium. By 2010, it will come down to 7%, and to zero by April 2011. No commission means that the life insurance agents will have no reason to scuttle the interests of the insured and sell inappropriate policies to earn extra bucks.
The problem is that squashing the incentive to mis-sell also takes away the motivation to sell because the agent no longer has an income. If there is no one to sell, most people in India are unlikely to buy insurance policies. So this proposal leads to a heavily skewed trade-off between no insurance and wrong insurance.
Most investors don’t buy insurance unless agents pester them on the phone every alternate day or a friend-cum-broker pushes a policy to meet his sales target. Even if they pick up a policy in the March rush of saving tax, how many investors know which policy is most suitable for them? The majority is not even aware of the various types of policies that are available. No wonder that 55-year-olds are sold pension policies and Ulips are projected as earning outrageously high returns.
The ignorance that makes investors susceptible to unscrupulous insurance agents is also the reason good agents are indispensable—to convince ordinary people to buy the right policy. Even mutual funds seem to be bearing the brunt of disinterested brokers as the equity mutual fund collections dropped by 4% in August this year after entry loads were scrapped. The total assets under management of mutual funds shrank by 1% in September.
Most people with life insurance do not necessarily have the best policies, but unlike other investments, sub-optimal insurance is better than no insurance. The investor might pay more, but thanks to the agent, he has a life cover. Without the intermediaries, investors will have to hunt out another access point for insurance policies like insurers’ Websites, read up the literature on insurance, calculate the sum assured and compare the policies offered by different companies. Only if they manage to do this will the situation improve over the current scenario, where agents push policies that earn high commissions.
Is this likely to be the result of scrapping commissions? Chances are no. Neither are investors so aware nor is the search for the correct insurance policy easy. Instead of throwing out the baby with the bath water, the incentive structure for agents should be altered to eliminate any conflict of interest with the buyer. This is not going to be simple, but then the simplest solutions are not always the best.
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