3rd Prize Winner – Shri Raghav Jain, Birla Institute of Management Technology
Mis-selling in Insurance and how to prevent it
1. Mis-selling at a glance By definition, mis-selling means selling a product by giving a wrong picture of a product, it may include, giving wrong information, giving unrealistic information, not giving full information about the product. You must have heard an insured, saying – but this was not I asked for. And, your agent accusing, but then I did mentioned all the details upfront, didn’t I? Insurance is a business of selling commitments and here is a case where this was broken. Unfortunately the product was mis-sold. Mis-selling is not unique to insurance and ...view middle of the document...
Insurance continues to be missold with senior citizens being the softest targets as they do not understand new products.
Figure 1. Different types of fraud affecting insurance companies. Source: Ernst & Young Report on Frauds in Insurance.
2. Mis-selling and its consequences • Lapsation Lapsation has been one of the major concerns for insurance companies. Generally, once the policy is accepted in life insurance, the insurer undergoes costs for administrative processes, agent’s commission and medical charges, which many times eat up almost whole the first years premium collected as well as the major part of second year premium. After incurring these expenses if there is an early lapse in the policy then it poses a major financial threat to the insurer. A major reason for lapsed policies is the lack of communication between the insured and insurer after the sale of policy, leading to strained relationships. IRDA’s annual report revealed that in 2010-11, policyholders surrendered policies worth Rs. 76,712 crores, more than double the amount (Rs. 36,225 crores) in the previous financial year. Also the total number of insurance policies – both public and private, that lapsed during FY 2010-11 stood at 1.40 crores, with an assured sum of Rs. 1.58 lakh crores as against 1.23 crores policies in the previous fiscal. There were 2,189 complaints of mis-selling registered with IRDA during the same period. • Cognitive Dissonance Often the misalignment in the objectives of the parties involved triggers mis-selling. For example, insured’s major objective may be to save taxes or built a corpus rather than life protection whereas the agent may be looking at earning higher commissions and helping him reach his target faster. This misalignment at the initial stage of policy itself may cause a huge divide at later stages. In case of insurance, cognitive dissonance will cause a previously cheated customer to never trust an insurance agent again, however good the policy may be. • Bad word of mouth The industry is facing the risk of bad publicity due to mis-selling. There are instances when people decline insurance policies just because of bad publicity by friends, relatives etc as they lose faith in it. 3. Factors leading to Mis-selling The various factors can be broadly classified as: • Product related issues The complexity of the insurance product and asymmetry of information between the insured and insurer or his agent has led to a minefield of mis-selling. Also the policy document is full of jargons and fine prints which make it beyond the comprehensive ability of the insured to interpret the real meaning. This leads to controversies between the policyholder and the insurer.
• Aggressive marketing
The insurance products are promoted aggressively by the companies and the agents have no option but to sell it by hook or crook. Often, they show a performance chart to the proposer which shows astronomical returns of 15% over a period of one year. Many...