Source : INDIA TODAY NEWS
Buying an insurance policy can become a costly mistake if the product does not match a customer’s needs or is sold with promises that do not tell the full story. The Insurance Regulatory and Development Authority of India (IRDAI) has now proposed a set of measures to make insurance sales more transparent and create greater awareness around mis-selling.
IRDAI, in its public consultation paper titled “Recalibrating Economics of Insurance Distribution”, has proposed specific regulatory guardrails to tackle mis-selling and make insurers and intermediaries more accountable.
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The regulator said unfair business practices are a leading category of customer complaints, with mis-selling having a significant impact on public trust in the insurance sector. It has also been a major cause of premature surrender of life insurance policies, IRDAI said.
“While most measures proposed in these reforms will combine to reduce mis-selling, it is also imperative that specific regulatory guardrails are established and awareness is built around this issue,” the regulator said.
SUITABILITY CHECK BEFORE SELLING INSURANCE
One of the key proposals is to make suitability an enforceable obligation.
IRDAI has proposed a detailed suitability framework for every insurer and insurance distribution entity. For life insurance sales above a defined ticket size, a documented needs and suitability analysis should be mandatory, backed by an appropriate audit trail.
If a customer chooses a product different from the one recommended after the suitability assessment, the reason should also be documented.
Importantly, simply obtaining a customer’s consent or signature should not absolve the insurer or intermediary of responsibility for selling an unsuitable product, according to the proposal.
IRDAI said such a framework could help deter practices such as presenting endowment or other savings insurance plans as fixed deposits or equivalent deposit products, particularly in bank-led distribution.
WHAT COULD AMOUNT TO MIS-SELLING?
The regulator has listed several examples of insurance sales that could attract disincentives or regulatory action.
These include selling a regular-premium product as a single-premium product or selling a regular-premium life insurance policy without explaining what happens if the customer stops paying premiums and the low surrender value.
Selling life insurance, including term insurance, to customers who are not in their working age or do not have dependants has also been listed as an example.
Similarly, customers without a steady income should not normally be sold regular-premium life insurance products that require them to make payments year after year.
IRDAI has also proposed safeguards for ULIPs. Selling such products to risk-averse customers or those beyond their working age without explaining mortality charges, risks to capital and uncertainty of returns could amount to mis-selling.
Selling participating or ULIP life insurance products with a false promise of assured returns is also among the practices flagged by the regulator.
DON’T SELL INSURANCE AS A FIXED DEPOSIT
IRDAI has specifically highlighted the practice of selling insurance products as alternatives to bank deposits.
The proposed guidance includes selling non-participating life insurance products in lieu of bank deposits even when their returns are lower than, or at best comparable to, bank deposits.
Selling insurance products as fixed-income deposits or high-return investment products has also been listed as an example of mis-selling.
The regulator has also flagged cases where customers are encouraged to withdraw from an existing policy or cancel it and buy a new product based on a misleading promise of better returns.
High-value single-premium products offering low liquidity and poor insurance coverage have also been included among the examples.
CLEAR AND SIMPLE INFORMATION FOR CUSTOMERS
IRDAI has proposed that promotional material should use factual and easy-to-understand language.
There should be a clear and bold mention of whether the product involves a single or regular premium, whether returns are assured or not, and the risks involved in ULIPs.
The regulator has also proposed that an insurer or intermediary’s policy on charging or receiving commission on insurance products should be readily available on its website and brought to the attention of customers being solicited for those products.
INCENTIVES THAT ENCOURAGE MIS-SELLING
IRDAI has proposed bringing all forms of remuneration, whether direct or indirect and monetary or non-monetary, within the definition of commission for regulatory purposes.
It has also proposed prohibiting volume-linked or reward-linked incentives for bank and NBFC staff selling insurance.
The regulator noted that sales incentives such as foreign or domestic trips, luxury gifts, milestone bonuses and contest rewards are currently common across the channel.
According to IRDAI, such incentives can create a direct conflict of interest with customer suitability.
SALESPERSONS COULD BE IDENTIFIED
IRDAI has also proposed tagging the functional identity of the salesperson with the insurance policy sold by them.
This could include specified persons, salespersons or Point of Sales Persons (PoSPs) of insurance distribution entities, as well as agents or associates of insurers.
Information on instances of mis-selling could then be placed in the public domain as part of the concerned person’s performance record.
IRDAI said this could help achieve four objectives — enable disincentives from commissions, fix accountability, alert future recruiters and, most importantly, allow prospective customers to make informed decisions by knowing the mis-selling history of salespersons.
The regulator has proposed enabling this functionality through the Public Insurance Registry.
IRDAI has also proposed that instances of mis-selling should lead to commission claw-back by insurers.
The measures proposed by the regulator seek to put greater focus on whether an insurance product is suitable for the customer, how it is presented and whether incentives given to sellers could encourage unsuitable sales.
– Ends
SOURCE :- TIMES OF INDIA
