Opinion | Smart people don’t buy money back life insurance

You are doing great harm to your financial well-being if you continue to fall into the trap laid down by life insurance companies, their agents and now the shareholders of these companies, under the benevolent gaze of the insurance regulator. How many of us are still buying these traps? In financial year 2018-19 (that is the latest data available), individuals bought almost 30 million new life insurance policies, pumping almost ₹1 trillion of household savings into them.

Which policies are the most harmful? Traditional plans that include with-profit money-back, whole-life, endowment policies and guaranteed plans are the worst. These make up 85% of the entire market. Ulips are not traps and are much better products but don’t do well on disclosures and flexibility as compared to mutual funds. Term cover, the best kind of life insurance that you must have, are hardly sold. They are largely self-bought as smart people figure out what to buy. They buy online, cutting out the agent.

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From junkets to knowledge

Rolf Dobelli is the author of the best-seller The Art of Thinking Clearly. The book http://www.dobelli.com/ is a guide to how not to fall prey to making mistakes we are wired to make. Dobelli’s book is the result of a personal quest to better manage his money.

As he read more, he hit upon a much larger field of academic work that pinned down the mistakes we make due to the way the brain has been wired through evolution. The hunter-gatherer instinct still lurks in a very different world, he says.

Carl Richards runs www.behaviorgap.com and is in the business of simplifying complicated financial ideas. Author of two books around the theme of getting people to stop doing dumb things with their money, he is a columnist, corporate trainer and speaker. Known as the Sketch Guy, Richards does a regular column for The New York Times.

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Chemist or doctor: Sebi’s nudge to the industry

How much disclosure is good? The answer to this question will decide if the 18 March circular issued by the Securities and Exchange Board of India, or Sebi, (you can read it here:http://bit.ly/1pwzzTf ) is a good idea or not. The background first: Sebi has been trying to get mutual fund sellers to decide if they are chemists or doctors. If, as chemists, they simply vend the product, then they earn the commission from the product. If they choose to be doctors, they do not earn a product-linked commission, but take a fee directly from the investor. This neat view of the world was rolled out with the adviser regulation that encouraged sellers to choose between being a distributor and an adviser in January 2013. (You can read the regulation here:http://bit.ly/1RwpKBN . And three years later, with less than 381 people registered as investment advisers, Sebi has changed regulations one more time to force the industry into the two-bucket market structure.

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What happens when a Rs.20,000 crore industry is tamed?

Expense Account, Mint

What we know anecdotally is now there as data in the Reserve Bank of India annual report 20011-12, that Indian household savings are moving from financial assets to real assets. The household savings rate has remained almost constant at about 23% of gross domestic product (GDP) (at current market prices) but there has been a portfolio reallocation within this broad number. Net financial savings of households (remove home loans and other personal loans from gross financial savings to get the net figure) have dropped from just over 12% in 2009-10 to just below 8% in 2011-12. Valuables, like gold, have more than doubled their share from 1.3% in 2008-09 to 2.8% of GDP in the last financial year. The slowdown has been most severe in small savings, bank deposits and life funds. Go deeper into the numbers and you see that households pulled money out of mutual funds in 2011-12 and invested less in insurance funds. We invested Rs.33,000 crore in mutual funds (MFs) in 2009-10, but pulled out Rs.10,600 crore last year. We bought Rs.2,59,800 crore of life insurance in 2008-09 but bought Rs.36,400 crore less (Rs.2,23,400 crore) last year.

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Should banks sell insurance at all?

Expense Account, Mint

Because much of policymaking in India is about lobbying power, we see some strange outcomes. Take the draft bancassurance guidelines, for example, that lay down the rules of bank tie-ups for insurance companies. The weird spectrum-like allocation of banks to insurance companies is a classic example of a compromise that benefits no one and will actually harm the market. Recent events in the bancassurance space that point to some companies tripping over regulatory boundaries corroborate this. The evolution of the November 2011 bancassurance draft guidelines (you can read them here) is the story of a face-off between two evenly matched lobbies. On one side is the insurance industry, with its flagship government-owned default sovereign wealth fund, the Life Insurance Corp. of India (LIC). And on the other is the banking sector whose lobbying power kept our money earning nothing because of a rigged formula to calculate interest rates on savings deposits that were fixed at 3.5% for years. The story of how the draft bancassurance guidelines came to be have enough masala to run a full Bollywood trilogy. But as of now, the banks are ahead.

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Do own-brand products leave you worse off?

Expense Account, Mint

In the market for a TV, I checked out all the vendors nearby. In the Sony and Samsung showrooms I got the Sony and Samsung TVs. In Croma, I got a variety of brands. On one TV it said Croma. That was the in-house brand which was cheaper than the other branded TVs. I find the same practice when I go to Shoppers Stop or Big Bazaar—own-brand retail is usually cheaper and is labelled clearly on the package. I know that it is cheaper because a quick check on the price tag tells me that. I can look at the picture quality, the specs of the TV or the style and cut of the clothes to compare with the other brands in the store. Can we say the same about buying financial products? Do consumers of financial products fully understand the impact of buying an own-brand product or do they allow themselves to be “advised” by their seller towards the product they end up buying?

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In defence of trail commissions

Expense Account, Mint

The Securities and Exchange Board of India (Sebi) has taken a welcome step to bring in a set of adviser regulations. It has released a concept paper on the regulation of investment advisers. India needs a new set of regulations to bring order to a marketplace that moves money between households and fund managers. Investors stay in inflation-unfriendly deposits and negative-real-return endowment insurance policies because they are unable to trust the intermediary who talks about putting their money in markets through mutual funds and pension products. The unit-linked insurance plan (Ulip) fiasco where investors were looted systematically by insurance companies, banks and distributors has not helped foster trust. The Ulip debacle was a case of misaligned incentives and for trust to be built we need to align the incentives of the investor with that of the intermediary, keeping in mind the fact that the bulk of the market finds it difficult to pay for services. There is still time before we come to a stage where there is a well-recognized designation such as MBBS or LLB that qualifies the person giving financial health advice to charge for services as an accepted part of the practice.

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Will 0.5% become the industry standard for transaction costs?

Expense Account, Mint

Are loads back? The distribution industry was agog when news filtered out last week that the Bajpai committee set up by the Pension Fund Regulatory and Development Authority (PFRDA) had recommended a 50 basis points (bps) charge on the National Pension System (NPS) point of sale. A quick backgrounder: The Bajpai committee was set up to find out why the low-cost NPS is not popular with the retirement corpus-targeting Indian. Less than 50,000 people have handed over about Rs 100 crore of funds to NPS in the two years it has been thrown open to the Indian public. In contrast, equity funds have gathered a net of Rs 470 crore of retail money in the past 12 months despite the absence of a load on the product.

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DIY. How to get your money back

Expense Account, Mint

I’ve long thought about how to handle the barrage of mail and calls from readers, viewers, friends and family asking for help to deal with a financial problem. The most worrisome are those that complain about a case of mis-selling, that is, the sale of a financial product by a banker, agent or planner, through deception about the product’s features, what it can do for the investor, its costs and its ability to solve an articulated problem of the investor.

The temptation to pick up the phone and get the problem solved is high. But that makes it good for just one person, leaving the deeper problem intact. And the messy issue of becoming a power broker yourself in the process—and a part of the problem. The regulatory change will happen but it will take time. Is there another way to crack it for somebody who has been hit by a wrong financial product and is in financial distress? The good news is that there is a way out. I find that the people who complain fall into two buckets. One, those who want somebody else to fight their battles. Two, those who are willing to engage with the problem but are uncertain of what to do. This piece is for those who find themselves sitting in bucket two. Want to do, but don’t know how. Chances of redress are highest for those in bucket two. And the feeling of empowerment is something the entire refunded money can’t buy! I’ve now seen a few people who have had their money refunded by banks, insurance companies and art funds that used verbal lies to sell these products. Here’s a three-step guide to a Money Back do it yourself (DIY).

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9 billion pounds: UK banks’ compensation for mis-selling insurance

Expense Account, Mint

Last week just as my Twitter feeds got active with links to the British Lloyds Banking Group blinking in its fight with the regulator, the Financial Services Authority (FSA), and agreeing to a £3.2 billion (Rs 23,427 crore) provision to meet insurance mis-selling claims, we at Mint were following the PricewaterhouseCoopers story.Mint reported that while global investors (including pension funds from the US, the UK, Norway and Denmark) in Satyam were to be compensated by the auditor found guilty of not following basic rules of an audit, Indian investors will get not a paisa (http://bit.ly/j9Zbg2). The Indian story was about a lack of clear regulatory jurisdiction, archaic laws and the inability to take tough decisions against large corporations. The British story was about consumer agencies active enough to push the regulator into action, the legal system providing the platform to do this and the institutional will to actually go ahead with a decision to punish that will make markets fall.

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