What would you call a regulation that is titled Protection of Policyholders’ Interests, but is anti-consumer in its direction and intent? The draft regulation by the same name released by the insurance regulator on 1 February 2017 (you can read it here: bit.ly/2l9NpgI) has removed some basic consumer-first provisions that an earlier 2014 draft had suggested. As investors and consumers of financial products, we should worry about this.
As I sit down to write this, a letter comes to my desk. Handwritten by a 90-year-old man, the letter seeks help from Mint’s insurance expert in resolving a fraud carried out by an insurance company agent who sold a policy for his grand-daughter, changing her status from a US citizen to a non-resident Indian and promising returns in dollars. It is the same old story again, of being lied to and being sold a policy that is very different from the one promised verbally. Stories of fraudulently sold policies are pervasive—one does not have to go very far to hear them. While nobody goes on record, every conversation with insurance sector insiders—be it with a chief executive officer, senior management or lower staff—confirms that there is a fire raging in the life insurance market due to very sharp sales practices to sell products that are huge value destroyers for the households. The average return on traditional life insurance products is in the 2-4% range per year over a 10-15-year period. Build in inflation and you get value destruction. First-year commissions are as high as 120% of the first-year premium, leading to predatory sales practices that would be called criminal in any mature market. Insurance professionals also confirm that nowhere else in the world do such value destroying products still exist. And they agree that mis-selling, lying and downright fraud are all used to push sales.