Why we need a completely different insurance business

Dhirendra Kumar, Economic Times 21/5/12

source: http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/why-we-need-a-completely-different-insurance-business/articleshow/13329806.cms

Suddenly, there’s a spate of media reports and analyses on how the Insurance Regulatory and Development Authority (Irda) may be in the process of bringing in a new set of stricter rules on a class of insurance policies known as traditional policies. The headlines of these news articles are instructive.

‘After Ulips, traditional plans come under Irda scanner’ and ‘Traditional plan clean-up begins’ are two typical headlines. The word ‘crackdown’ also appears in some articles. All in all, this is the kind of language you would expect to find in news stories describing how policemen are cracking down on drug peddlers or pickpockets. The facts in the stories are straightforward.

Through 2004 to 2010, insurance companies raked in money hand over fist by peddling Ulips which appeared to have been expressly designed, in terms of commission levels and structure, to be mis-sold . Millions (literally) of insurance agents made money hand over fist milking unsuspecting customers.

In 2010, Irda put an end to the great Ulip robbery by bringing in a new set of rules that, compared to the earlier ones, made Ulips a lower-cost and relatively more customer-friendly product.

At that point, the insurance industry had a collective change of heart, cleaned up its act and started enthusiastically selling products that were good for the customers . OK, those of you who know how this business works can stop laughing now, the previous sentence was obviously a joke. What actually appears to have happened is that the insurers shifted focus wholesale to the so-called traditional plans.

And sure enough, two years down the line Irda finds that it’s time for another crackdown or clean-up or whatever you’d like to call it. Suddenly, there seems to be a realisation that these policies combine high commissions, low transparency and poor returns. Essentially, they are tailor-made for the manufacturers and sellers and harmful for the customers. What do you think will happen now?

My guess is that if Irda succeeds in cleaning up traditional plans, the way it has with Ulips, then the insurance business will basically shut down in India. Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results". I think it should be clearly recognised that cleaning up products one by one is not the solution.

There is something more fundamentally wrong with the insurance business. This could be in its structure, or the mindset of people who run it or have invested in it, or something else. In any case, the industry is in the process of proving that it can flourish only by screwing its customers.

Amusingly, the idea that the insurance business is all about ripping off its customers is now so deep-set that a big insurance company-Max New York Life- has based a major ad campaign around it.

The TV ads show an insurance salesman refusing to mis-sell. It’s actually quite a perverse idea – an entire ad campaign whose underlying message is "we know you expect insurance salesmen to be cheats, but we are able to resist the temptation" . But full marks for being honest about the problem anyway.

If this cleaning-up is to succeed, then it’ll only be when we have a completely different kind of insurance business. The fundamental problem is products that mix the very different goals of investment and insurance. Once you have that, you are on the slippery slope of increasing product complexity , higher selling effort, higher costs and all of it eventually has to come from the customer’s pocket.

Somewhere , the broader goal of providing the safety net of insurance cover to a large mass of Indians is completely forgotten. Unless the insurance business is redefined as only real insurance , this contradiction at its heart won’t go away and this cycle of anti-customer behaviour and endless clean-ups will go on.

The author Dhirendra Kumar is CEO, Value Research

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