Why there is a bad smell about life insurance in India
The very high front incentives are triggering massive mis-selling and fraud in life insurance. I worry that as the unbanked now get into the formal financial system, we are setting them up for financial disaster.
A recent story reports on mis-selling and fraud by a bank in rural Rajasthan where they allegedly made bank deposit customers put their signatures on life insurance products of a group firm. While the story of people of small means being cheated out of their money is worrying enough, what is of greater concern is that this problem is not limited to one insurance company or bank, or location. Life insurance mis-selling and fraud by bank branches is systemic in the country. The evidence to this statement comes from three sources. The first is anecdotal: almost everybody who has a bank account has a mis-selling or fraud story to tell about life insurance. For those who superciliously turn away from anecdotes, there are three academic papers that nail the problem. In 2014, two economists and I, wrote a paper estimating that policyholders lost over Rs 1.5 trillion from mis-sold life insurance plans between 2007 and 2012. In 2017, I published another in 2014.
The very high front incentives are triggering massive mis-selling and fraud in life insurance. I worry that as the unbanked now get into the formal financial system, we are setting them up for financial disaster. The insurance regulator needs to rationalise front commissions, put in place persistency targets and reduce the loss policy holders take if they stop the policy after one premium. Life insurance in India must stop being a trap.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at monika.h@livemint.com.
The views expressed are personal