Bringing trust back in life insurance products

Pushpa Girimaji

Despite several insurance regulations aimed at protecting consumers at the point of sale, policyholders have been victims of mis-sale by unscrupulous insurance intermediaries, including corporate agents. The complicated nature of life insurance policies, particularly unit-linked products, makes it difficult for consumers to fully understand the contours of the policy and make an informed choice. So they depend on intermediaries as the experts who can help them. However, agents often misuse this trust, misrepresent the benefits and sell policies least suited to the prospect, causing immense financial loss.

A perusal of the complaints pertaining to mis-sale, handled by the insurance Ombudsmen in different parts of the country, gives an insight into the fraudulent practices perpetrated by the intermediaries. The orders of the Ombudsmen also show that in most of these cases, the insurers are not prepared to accept that their agents have indulged in mis-sale or fraud and are unwilling to redress the policyholders’ grievance, thereby forcing them to seek the help of the Ombudsmen.

The directive issued by the IRDAI in September this year to life insurers asking them to ensure “a fair and transparent sales process with meaningful, timely and relevant disclosures” is an attempt to tighten the regulatory control over the way life insurers sell their policy.

Norms for insurers

According to a circular sent to all insurers for compliance from December 1, every intermediary selling an insurance policy has to ensure that the policy is suitable for the particular consumer. In order to do that, the agent has to first understand the customer profile and needs by collecting a detailed ‘suitability information’. To prevent any scope of mischief, the regulator clearly defines what constitutes ‘suitability information’ and directs insurers to train the agent for the job. To prevent information distortion, the regulator has mandated that the document be signed by both the agent as well as the consumer. This will form part of the policy records, available to the regulator for inspection.

The directive says that every life insurer should provide customised benefit illustrations at the point of sale. Here again, there is no ambiguity. It prescribes specific formats for each type of insurance and recommends the use of simple, easy to understand language. On this document, too, both the intermediary and the policyholder are required to sign. It’ll form part of the policy document.

Consumer protection the key

Since a number of complaints of mis-sale pertain to unit-linked life policies, the regulator pays special attention to this. It says that “in respect of unit-linked policies, the agent or intermediary shall clearly indicate how the premium paid is appropriated towards various charges from the unit fund and the balance of the fund at the end of the first year and subsequent years. The upfront charges in the initial years have to be brought to the knowledge of the policy holder”. The regulator also wants agents to have the expertise to sell ULIPS and recommends curriculum for their training.

The directive also mandates that advertisements on ULIP disclose the risk factors, along with warning statements saying that the premium paid in ULIPs are subject to investment risks associated with capital markets. There is also emphasis on consumer education.

All in all, it’s a well-thought-out and detailed directive aimed at preventing mis-sale of life insurance products. However, for it to work effectively and serve the purpose, the regulator has to mandate that intermediaries/insurers provide information not only in English, but also in local languages. This should apply to the written information too, or else, consumers may well end up signing on English texts at variance with the verbal assurances given to them, thereby losing their right to legal recourse later. This would also defeat the very purpose of asking consumers to countersign the documents. In case of uneducated consumers, it may become necessary to record the entire information verbally and give a copy to the consumer.

Even while protecting consumer’s interest, the directive casts a responsibility on consumers to invoke the right to informed choice given under these directives and make sure that they are not taken for a ride. They must sign on the documents only when they have fully read and understood the content and buy products only after they are absolutely convinced about the suitability of the product.

— The writer is a consumer rights expert

KEY DIRECTIVES

Benefit illustrations

Every insurer should provide customised benefit illustrations to prospective policy buyers. These illustrations should be based on the prescribed format and not in any way be misleading.

Financial planning for pension 

Any pension product should disclose an illustrative target purchase price for each policyholder, considering the premium payment capacity, age, vesting age and future expected conditions. Also the risks, if any, including the targeted premium rate in meeting the targeted purchase price.

Suitability

Agent should determine the suitability of the policy to individual consumer on the basis of ‘suitability information.’

Disclosures

Full and complete disclosures to ensure transparency and help consumers make an informed choice. Apprise the prospect of risks in investing in ULIP.

Advertisements

Should warn that ULIPs are different from the traditional insurance products and are subject to risk factors.

Annual reports

Insurers to send annual reports to policyholders disclosing the status of the policy, accrued bonus and other benefits, paid-up value and other relevant information. In case of ULIPs, it shall at minimum contain information on the number of units to the credit of policyholder, fund value at the NAV rate applicable and changes in the units from the last issued status report.

Training intermediataries

To acquire expertise to sell ULIP and also to collect and analyse suitability information.

Consumer education

Insurers should educate consumers on a continuous basis about various life insurance products, particularly ULIPs.