The agent may be mis-selling but why has IRDA allowed such an incentive structure?

An obnoxious mix of regulatory breach and a Ponzi scheme — the insurance agent, I’m pretty sure is a direct selling agent as well. This could be merely a rather enthusiastic (enterprising?) agent taking commission-maximisation to a new orbit and like a good entrepreneur, sharing it with doctors. And then, maybe not. Maybe, we’re ignoring the other stakeholders in this business — government, IRDA and industry – and allowing them to go lightly, even scot-free, as we condemn the agent. For, don’t the government and IRDA know what’s going on here? If they do, what are they doing about it? If they don’t, just which armchair world are they living in where right under their noses, a whole industry is turning insurance into a high cost investment business or, as the letter implies, seeking out high cost, high premium individuals illegally?

The poor agent is only the face of the industry, the last and potholes filled mile that needs to be regulated. And perhaps we’re being rather harsh on him, questioning his intention while all he’s doing is what any rational being would do — sell what sells, earn the maximum return per unit of effort. Quite like Delhi’s Blue Line bus drivers who, caught in an incentive system devised by their politician-police employers, are leaving graves and cremations behind them every day. Like the drivers, insurance agents too need to be regulated. But like bus owners, the insurance industry too needs to be brought under the magnifying glass — why create such an incentive structure in the first place?

IRDA is no different from those whose mandate it is to regulate Blue Lines — bad laws, poor industry practices, non-enforcement. These practices, the worst of the West so far (it’s getting worse — see how Wall Street is turning life insurance into what BusinessWeek calls “Death Bonds”), have been imported lock, stock and barrel, without trying to improve, innovate or see them from financially illiterate consumers’ point of view. What we end up with is a mockery life insurance, a great product and perhaps the first financial instrument a household should be buying. And just as Blue Lines are leaving crushed bodies and tears behind them, the agent-industry-IRDA combine, while making holy noises of increasing insurance penetration in the country, is leaving a huge mass of uninsured or under-insured consumers.

… And here’s the solution

The problem is not going to go away, so IRDA and finance ministry need not behave like ostriches. And all is not lost, there are solutions — provided those who have been mandated to protect consumers’ interests dare to walk the untrodden path, using innovative practices rather than imported ones. But innovation has a tendency to destroy existing orders, so we can rest assured that incumbents will oppose any such move.

The simple solution: stop upfront commissions — now. I’m sure the industry will be up in arms and will present 2-hour power points saying how absurd the idea is, how journalists don’t understand finance, how the industry is not in the business of fleecing. Their most potent argument is likely to be on how upfront commissions are global norms and benchmarks, how India can’t be different from the way the rest of the world functions. But finance ministry will have to ask them just two questions. One, why do they want 20 years’ commissions paid upfront when the product servicing is going to end in three years? Two — and this needs a leap of faith and the conviction to fight entrenched, fossilised ideas — this model is not working in India, does the industry have an alternative? If not, end it — this legal rip off has gone on for far too long. Global benchmarks be damned.