Just A Brick In The Wall: Can Irdai’s New Proposals Make Insurance Better For Policyholders?

The latest consultation paper by the Insurance Regulatory and Development Authority (Irdai) is a step in the right direction, with proposals to curb mis-selling, cap commissions, and introduce more transparency across insurance products. The question now is whether it addresses the primary concerns of policyholders. Will premiums reduce as distribution costs get capped? Will they get the product they really need and not be mis-sold? Will they have a smooth claims experience?

First, the cost to the customer. The paper does not specify how savings will pass through even though it links overall lower costs to affordability. While the distribution costs may go down, depending on the category of the distributor and the complexity of the product, whether they will translate into lower premiums for customers is not clear.

Second, mis-selling. The paper has wide ranging proposals on how to curb the malpractice that complement the Reserve Bank of India’s (RBI’s) regulations released in June. The paper addresses three broad areas. One, suitability, where the seller needs to have a detailed framework. For instance, a term insurance may not be suitable for someone nearing retirement and having no dependents. Two, incentives, where it proposes banning volume-linked benefits. So, no foreign or domestic trips or bonuses or luxury gifts for bank staff as sales incentives. Three, identifying the sellers behind each policy to fix accountability. It is proposed to “tag functional identity” of the specified distributor “with the policy sold by the concerned person, and placing the information on incidences of mis-selling in public domain as a part of performance of the concerned person”. This may effectively alert prospective customers.

Other measures include claw back of commissions in cases of mis-selling and prohibition on compulsory bundling of insurance with other financial products and services like loans (packages with demonstrable gains may be allowed).

Of all these measures to curb mis-selling, the suitability question is the most tricky. The qualification criteria for insurance distribution persons (IDPs) has been changed from Class 10 to Class 12, and training hours from 75 to 100. In my experience, even the most qualified individuals are often unable to understand the concept of insurance, let alone the details of an insurance policy. Insurance products are usually complex, especially when protection is combined with savings, investments or market-linked products. To expect the distributor with the above qualifications to understand and then explain the products to a policyholder seems impractical. A closer look is also needed on the on-ground functionaries of insurance distribution entities (IDE), including brokers, corporate agents, web aggregators and so on.

The paper does recognise the communication problem. It proposes standardised one-page information sheets and FAQs in simple language, but this is different from simplifying the underlying policy wording itself.

Third, the claims experience of individuals, particularly in health insurance. The paper acknowledges that the issue of claims experience receives insufficient recognition and that distributor remuneration should better align with claims efficiency, among other factors, but it doesn’t set out concrete steps linking distributor pay to claims outcomes.

The next task for Irdai is cut out: to make insurance not just cheaper to sell, but cheaper in the hands of policyholders. Besides, friction needs to be reduced at renewal, during a dispute and, finally, at the time of a claim.

Nidhi Sinha Editor­, Outlook Money