Why are agents mis-selling insurance policies?

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Mis-selling of insurance policies is something that has become very rampant in today’s times. What most people do whenever any such topic enters the conversation, is to put the blame on the shoulders of the seller. However, while this is definitely true to a large extent, some of the blame for being easily misled should also fall on the shoulders of the specific rules and regulations which make it easier for sellers to mis-sell insurance policies. Here are some of the key reasons behind agents mis-selling insurance plans in India.

Top 4 reasons why agents mis-selling insurance policies:

  • Principles of Accounting: The principles for accounting that are adhered to in the mainstream sector is that income is the premium that is collected by the insurance company while the liability is the risk that is covered by the insurer. The business is regarded as on a proper footing if the income is high and liability is on the lower side. The management will naturally look to sell policies with higher premiums as compared to coverage provided. A pure term insurance policy is one that ensures the lowest possible income for the insurer while building the highest form of liability. As a result, it becomes good business for insurers to encourage selling of insurance policies linked to investments in order to scale up their overall incomes.
  • Rules: IRDAI rules previously made it compulsory for agents to generate business from a particular policy count annually while collecting a minimum amount in premiums annually. However, these thresholds are now fixed by the insurance companies. The actual parameter should have been the risk coverage in place of the premium.
  • Income Tax Act Regulations: Section 80C of the Income Tax Act offers deductions on premiums paid for life insurance. The deduction covers the premium paid and not the risk coverage. Many clients do not know the coverage they possess but are aware of the premium they pay annually.
  • Commission: The commission of the seller is tied to the premium payments and not risk coverage. The seller usually comprises of the agents and sales personnel of the insurer. The emphasis will be on the premium paid at all times. Pure insurance policies, as a result, are outstripped in sales by insurance cum investment plans.
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Multiple changes and modifications are required for changing things in this regard. Principles of accounting will naturally remain the same. There is more scope for reforms in this space. Tax laws and other rules should be amended to tie deductions to the risk coverage and not the premium payable. Present regulations do not enable deductions in case the premium is higher as compared to the risk coverage. Many taxpayers continue to be unaware of this aspect, which leads to wrongful deductions causing a loss for the exchequer or deductions which are not allowed which lead to the policyholder’s loss. Mis-selling takes place either way.

There could be new regulations mandating disclosure of commissions earned by agents like SEBI has introduced for mutual fund distributors and agents. Insurers can provide a comparison of several products to customers including pure term insurance and investment cum insurance plans. This should cover the risk coverage, maturity value if applicable, payable premium and commission amount of the agent.

Why Insurance Samadhan- Many customers complain about being misguided by their insurance providers. After encountering many such dissatisfied customers over the past two decades, we created this online portal to provide them with a redressal platform. Our experts from the insurance industry will represent you with the insurance companies and will help you to find adequate redressal for your grievances.

Shailesh Kumar

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