NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, November 26, 2014

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.

What makes prevention of life insurance fraud and mis-selling such a tough regulatory battle? The answer to this leads us to a perpetually hungry-for-funds government. And that brings me to the point that it’s not often that a finance minister (FM) gets a golden moment to carry out deep reform. Such a moment will arrive in the course of the next few years and this writer is hoping that the FM is able to seize the opportunity.

The problem is this: Indian household savings have been used to give cheap funds to the government to finance its deficit through banks and insurance companies. The stock of life insurance premiums invested in central government securities stood at Rs.5.1 trillion for the year ended 31 March 2013. Another Rs.10 trillion is invested in “state government and approved investments”.