At this time of the year, there's generally a lot of news about exams and grades. Exam results are announced and newspapers tirelessly recycle the same headline that they have used for the last fifty years or so, namely 'Girls outshine boys again', apparently under the belief that this is the whole purpose of school exams.
However, this year there's a different kind of news about a different kind of exam too. Unlike school and college exams, where 'grade inflation' is a big concern, the problem here is the opposite. This exam is one conducted by the insurance regulator, IRDA, and is called the Pre-Recruitment Agents Examination. As the name indicates, prospective insurance agents need to pass in this exam before they can be recruited. The syllabus of the exam consists of a range of practical topics covering various aspects of insurance, of advising clients and helping them choose the most suitable products. The exam consists of 50 multiple-choice questions that have to be completed in an hour.
However, but there's a problem. It seems that not enough of the examinees are able to clear this exam. Therefore, IRDA has decided to reduce the passing marks from 50 to 35. Put another way, earlier someone unable to answer half the questions was qualified to advise you about choosing the insurance and investment products that insurance companies sell. Now, someone unable to answer two-thirds of the questions is also qualified to give such advice. I'm not sure whether this can be called progress.
The IRDA letter that announces this change notes that one of the factors driving it was the declining number of people who are sitting for the exam. The letter notes that since agents work under the supervision of the marketing officers of insurers, they could be provided on-the-job training. However, if you were to bother Googling for the question papers of this exam, you would be alarmed. It isn't exactly rocket science. Anyone who purports to sell insurance and has a modicum of interest or aptitude in the subject should certainly be get a decent score.
Actually, whether someone fails at answering 65 per cent of the questions or 50 per cent is not the issue. What the shortage of agents and the lowering of the pass-marks points to is a deeper problem with the way insurance is sold. We persist with the idea that selling insurance requires a vast agent force who will be knowledgeable and motivated enough to act as genuine financial advisors. Supposedly, they will have a meaningful conversation with a potential client, digest the information, give it some deep thought and then come up with measured advice. This is fiction. They are salesmen who act purely in their own and the insurers' interest./
And IRDA's loosening of the standards reflects the reality that agents are just salesmen. Unfortunately, this move is a step towards institutionalising this doublethink. It indicates that the industry and the regulator are to go on pretending that these people are serious advisors while quietly lowering standards because pragmatically, they know that no real advice will be given. One hopes that this is not indicative of the direction IRDA will take under its new leadership.
But why engage in this hypocrisy at all? Why not admit that the business dynamics no longer allow for real advisors to be engaged with any but the largest clients and everyone else is just a salesperson? For small, retail customers products should be chosen according to a tightly-defined, regulator-sanctioned and publicly-known algorithm which ensures that no mis-selling happens.
For mutual funds, SEBI is already moving towards a regime where the regulations themselves recognise that there are just distributors, who work for the manufacturer; and there are advisors who work for the client. Given the sad history of abusive mis-selling of insurance, something like that would be a better solution for customers.