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Mis-Selling Makeover

Insurance buyers may see costs slashed to zero and get targeted service, if certain recommendations are adopted

Last week, the Government of India's high-powered committee on financial reforms, chaired by Pension regulator Dhirendra Swarup made its recommendations public. Although, the report had many points that were of great interest, the one that caught the most attention was, understandably, the drastic reduction of the commissions that are paid out of insurance premiums to insurance agents. If the Swarup Committee's recommendations were to become the rule, then the amount of money deducted for commissions from the premiums that customers pay would gradually drop from the current 40 per cent to zero by 2011.

More than the actual progression of the reduction, what is most admirable about these recommendations is the clear and unequivocal connection it makes between commissions and mis-selling of insurance products. High commission levels are not an incidental evil. It's not as if insurance customers are paying a high cost for what is otherwise a good deal. Instead, high commission levels practically guarantee that customers will be sold products that are harmful to their financial health and will continue to deliver that harm over and above the initial financial damage of having a huge commission deducted from the premiums. Mis-selling is not an incidental evil that results from poorly-trained agents and financially illiterate customers. Instead, it is built into the current business model of the insurance industry.

However, these recommendations have not become the actual law yet, and I'm keeping my fingers crossed on whether they will ever do so. The insurance industry wields tremendous influence in the corridors of power as well as in the media and you can expect all manner of arguments being put forth against these recommendations. There was this story, narrated with a perfectly straight face, on a business TV channel the other day which said that insurance reforms would lead to lower unit-linked insurance plan (ULIP) sales, which would lead to lower investments in the stock markets, which would affect the country's infrastructure development. I guess the implication is that it is an act of patriotism to have 40 per cent of your premium payment deducted and handed over to your insurance agent. I'm now eagerly waiting for someone to discover how fixing insurance mis-selling could damage the Indian cricket team's performance and worsen global warming.

Beyond the specifics, one important part of the committee's report is its comments on the negative impact of the diversity of financial regulators we have. People save and invest through banks, the post office, PF, stocks, mutual funds, insurance and now the NPS. The regulation of these entities is done by different bodies without any overarching principle. This creates a sort of a regulatory arbitrage which pushes savers towards making choices based on factors other than the inherent suitability of financial products.