eading the Irdai (Insurance Regulatory Development Authority of India) draft on updating regulations for unit-linked insurance plans and traditional policies, you get the impression that somebody gave an aspirin when what was needed was a heart surgery. Product structures in finance are taking on a new importance globally because mis-selling and unsuitable sales can be reduced by taking the tricks and traps out of these products. This simply means that the costs and benefits are better defined and marked so that investors are able to understand the features of the products properly. Product structure rules also deal with early exits and their costs so that investors are not trapped in products they buy.
Both anecdotes and data seem to suggest that Indian health insurance polices that are bought by us as individuals don’t pay up as much as they should. As we listen to the stories of our friends and family about the run around given by hospitals and medical insurance firms to pay up claims of a hospital bill, we quietly send up a prayer—please let me not be the one whose claim is rejected if I ever need to use my policy. There is increasing distrust in the medical insurance market for privately bought covers. Covers bought by corporations, called group covers, seem to have less problems of claims getting rejected.
The anecdotes are supported by data. A May 2018 working paper, titled Fair Play in Indian Health Insurance has done a deep dive into the sector. The big findings are two. One, claims are not paid as much as they should be. Two, India has the highest complaints rate when compared with other countries.
As the security woman at the entrance to a multiplex turns my hand bag inside out giving competition to an airline security check, she gleefully hits pay dirt. Not a small grenade, she’s found my bottle of gum and my tiny jar of dry fruit. No food allowed. But this is not food, it is something I carry in my bag all the time. An argument ensues and the movie experience is reduced. Once inside the complex, I find myself unwilling to pay exorbitant prices for average quality food that is pushed hard by ushers-turned-waiters who come in the way of movie watching.
What food costs inside a multiplex is suddenly part of the urban middle class discourse at dining tables, at social events, on social media, with the humble popcorn itself at the core of this debate. Popcorn in a multiplex costs about 500% more than what you get outside in the mall. Pop them at home, and the mark-up is more than a 1000%. While there is other food and drink being sold that is more expensive than retail prices outside, the price point of popcorn shows the highest mark-up. To force sales, multiplexes prohibit outside food from entering their premises, making for a captive consumer group who is out to have a good time and is in a mood to eat, drink and be entertained.
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 paper that mystery shopped bank branches to catch mis-selling. I found that bank officials lied most of the time on features around costs and costs of early redemptions to potential customers. A 2015 paper by Anagol et al find that agents overwhelmingly recommend life insurance products that are unsuitable to the customer but get the agent high commissions. Three, two government committees, Swarup and Bose, have found life insurance to have very high front incentives that cause sharp sales and fraud. (Disclosure, I have served on both the committees).
If you have had the occasion to have economist and Nobel laureate Richard Thaler sign a book for you, it’s likely that you have one that says, “Nudge for good” or “Misbehave for good”. Nudge and Misbehaving are books written by Thaler. Nudge, written earlier than Misbehaving, is about tweaking the choice architecture so that people make better decisions. For example, if we know that people will choose one item out of the first three on a menu card, a nudge would put healthy food in those spaces, while keeping all the other choices at number four and below. Nudges work to help us overcome our biases that prevent us making good decisions. Bad nudges have been used by corporations to trick us into doing what they want and may not be in our interest. For example, an auto tick on a travel insurance policy on an airline website is a bad nudge. Thaler wants nudges to be used for good. He wants them used for setting up the game so that average people take decisions that work for them. For example, a positive nudge is the Save More Tomorrow programme (bit.ly/2hYxfGy) that allows people to promise to save more next year.
This would easily qualify as one of the worst moments of your life. That ping which says: your account debited with Rs30,000, and your current balance is now Rs2,467.20. Your blood chills and hands shake as you realise that you’ve been robbed—this is not a transaction you just made. Did I schedule a payment and forget about it? Did my spouse, who has my personal identification number (PIN), make a transaction? But I did not get a one-time password (OTP). You feel exactly the same way as you would, had somebody physically snatched your purse out of your hands. Robbery leaves the same feeling of disbelief and damage, whether it is virtual or not—the loss is very real.
While the loss you take home when cash is ripped out of your hand is yours, the responsibility is that of the bank when it happens in the virtual world. The banking regulator, Reserve Bank of India (RBI), has taken forward the draft it had released in August 2016 that thought through liability issues of electronic theft of money. The bank will now have to make good your entire loss if it happens through an unauthorized transaction or if the electronic theft happens due to a fault within the bank’s systems. You don’t even need to report this. For instance, when the data of nearly 3.2 million debit cards was compromised between May and July 2016, it was due to a virus in the systems of Hitachi Payment Services, the firm that manages the bank’s ATM network. In an event such as this, you do not have to report the loss of money, the bank will have to make good on it because its system failure caused the loss and many people are affected.
I don’t think there will be many people in urban India who do not have a bank mis-selling story to share. The systemic use of bank branches to mis-sell life insurance products and to churn mutual fund portfolios is now part of the urban Indian discourse. The problem is not new. I remember first raising the issue of banks mis-selling insurance and mutual fund products in 2007 with one deputy governor of the Reserve Bank of India (RBI). I was treated to lunch and anecdotes from those in the room of how people close to them were ripped off by banks. In fact, subsequently, in every committee I served on—Swarup Committee 2009 (bit.ly/2tLat6F) and Bose Committee 2015 (bit.ly/2rS3xmK)—the offline conversations included stories of bank branches turning into dens of tricks and traps. I’ve raised the issue of mis-selling with RBI, and with the ministry of finance, and so have others who work in this space, most notably Moneylife magazine (bit.ly/2t7r5HJ and bit.ly/2sHtN6b), which has raised it on multiple occasions. But the messaging that came down from the towers of oblivion on Mint Street was always the same: not our problem; let the sector regulators deal with this.