Editorial: Rein in the insurance middlemen

Anyone who has been sold a dud insurance policy by a clever bank relationship manager will be encouraged by the consultation paper released by the Insurance Regulatory and Development Authority of India (IRDAI) last week.

Titled ‘Recalibrating the Economics of Insurance Distribution’, the paper lays bare the system of hefty commissions paid to intermediaries (agents and distributors), which has led to predatory mis-selling of policies to unsuspecting customers.

IRDAI is seeking to put an end to this predatory sales practice.

Few individual insurance buyers are aware of the huge middleman costs that inflate their premiums. These payouts frequently exceed 40% of the first-year premium for a life insurance policy, 30% for health cover, and 25% for third-party motor vehicle insurance.

The payouts scale down in subsequent years but remain a sizeable source of income for the distributor while being an irksome cost to the customer. IRDAI is now proposing to cap these commissions for individual policies at 25%, 20%, and 2.5% respectively. If the savings are passed on to buyers, this cutback should lead to significantly lower premiums.

By paring down commissions, IRDAI will reduce the incentive for banks, agents, and distributors to thrust inappropriate policies upon under-informed customers.

This system has contributed to a skewed growth of the insurance industry in India. Distributors with an eye on commissions mis-sell policies to customers, who realise much later that they’ve been sold something they did not really want and drop out. Commission incomes have grown but insurance cover has not.

In the past two years, agent remuneration grew 125% while new-business premiums managed a modest 28% growth. In motor insurance, premium collections grew 34%, but commissions skyrocketed by 259%. This explains why persistency has always been a problem in the Indian insurance industry.

Some 52% of the life insurance policies lapse by the fifth year because unsatisfied customers choose not to pay the premium any longer.

IRDAI is now proposing to introduce penalties on banks if they push unwanted policies upon customers. Banks can no longer set volume-linked targets for their staff or offer cash bonuses and rewards for hitting insurance sales numbers.

If a bank or agent is proven to have mis-sold a policy, the commission earned on that sale will be recovered and the salesperson will be shamed in public. Also, a bank can no longer force a loan-seeking customer to buy insurance compulsorily, which is a nefarious practice they routinely indulge in currently.

Among the fresh proposals is a ban on dark patterns employed by web-based insurance platforms.

These websites now routinely insist on knowing a prospective customer’s personal details just to show them basic policy pricing, features, and performance details. Insurance buyers can browse anonymously until they decide to make a purchase.

These are currently only proposals, which are open for stakeholder discussion until October 25. IRDAI will draft its final decisions based on the feedback received. The regulator said it will follow a five-year gradual ‘glide path’ to bring in the reforms.

That’s rather too long a runway and there is no guarantee that savings on commissions will be passed to the end consumer. For these proposals to yield the intended results, IRDAI must ensure that they are. If not, the insurance industry will remain mired where it is while the mutual fund industry is growing by leaps and bounds.