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Published in Mint on 14 October 2015, Written by Kapil Mehta

Last weekend, I was in Varanasi for a short break. Sailing down the Ganges by the ghats we were transported into a different world. The cycle of birth, life and death were vividly portrayed in a half-hour boat ride. I find it hard, however, to get rid of my insurance-tinted view of the world. When our guide showed us the level to which water rises during the monsoon, I couldn’t help but wonder if the buildings abutting the river were insured. When I saw little children swim across the river oblivious to the undercurrents, I wondered if they have personal accident insurance. I doubt it.
Insurance penetration drops precipitously if one moves out of the metros to state capitals and even lower still in other towns. The main reason is that insurance distributors—agents, brokers and insurers themselves—are heavily concentrated in the metros. For example, of the 2,086 private sector general insurer offices, only 275 were outside the tier 1 cities. I counted about 10 in Varanasi, which implies that fewer than 40% of private sector insurers have an office there. Similarly, only 21 of 384 brokers were based in Uttar Pradesh and this number has not changed over the past two years. I could trace only one broker in Varanasi.
A large number of quality distributors are essential to sell more insurance. Insurers have steadily built underwriting capability, buyers are increasingly aware of the need to insure themselves. And it is distribution that is the weakest link.
Good distribution develops when regulations are clear in their objectives and executed properly. If done well, regulations encourage good candidates to become distributors and stay in the business for the long run. And what must the regulations ensure? First, it must be clear whether the sales person represents the buyer or the insurer. Second, the sales person should sell products she understands. Third, commissions must not skew product sales unfairly. Fourth, buyers should be able to have their complaints resolved fairly. And fifth, distributors must self-regulate rather than wait for regulatory pronouncements. On all these dimensions, we fall short.
So, how does a buyer know if a sales person represents her interest? In many markets there is a clear distinction between agent and broker. An agent (individual or corporate) represents the insurer. They have access to a select set of products and sell only those. A broker (individual or corporate) represents the buyer. They have access to many insurers and earn the same irrespective of the product sold. In India, this distinction is blurred. All the entities distributing insurance—individual agents, corporate agents, insurance marketing companies, brokers and web aggregators—sell products from multiple insurers. Strictly speaking, individual agents are not allowed multiple insurers but get around this by having family members take up numerous agencies. This means that an insurance buyer has no way of determining who represents her interest. Buyers assume that a sales person speaks for them and are let down when they buy bad insurance. They would be better off assuming that the sales person always represents the insurer’s interest and ought to be sceptical of the sales pitch.
The next question is: Do sales people understand what they sell? Most don’t. A basic issue is numeracy. While recruiting experienced sales people into our company, we give them a simple math test. Fewer than 10% are able to calculate an interest rate or a profit percentage. Without this basic numeracy how can you sell an investment-oriented life insurance where the main feature is an annual investment return? Similarly, selling general insurance requires an understanding of exclusions, warranties and limitations. Most sales people I meet only have a superficial understanding of these.
Our commission structures cause significant product skews. In life insurance the rise and fall of unit-linked insurance plans (Ulips) is linked more to commission than market movement. Traditional insurance is over 70% of the market because of its relatively higher upfront commission. Commissions can also depress product sales. Only 5% of group life insurance is sold by distributors compared to over 70% of other commercial insurances. Why is this? Because commission in group life insurance is restricted to 2% and capped at Rs.50,000. Hence, there is no incentive for distributors to enter this large segment and buyers suffer because of a lack of competition. Similarly, low commission is a big reason for low pension sales.
There is no effective independent body to resolve complaints against distributors. The ombudsman follows a long process and excludes many complaints. The Insurance Regulatory and Development Authority of India (Irdai) facilitates a hearing by the insurer but does not adjudicate itself, and courts are time-consuming.
Self-regulation is at a nascent stage. I am yet to see the general and life insurance councils, broking or surveyor association, issue a public order against any member. Limited self-regulation forces the industry to look to Irdai for solutions to distribution rather than take charge of the issues itself.
However, it’s not all gloom and doom. Many of these issues can be addressed by good regulation and monitoring. First, there needs to be a clear demarcation between agents and brokers. The overlap that has crept in should go. Agents must represent one insurer, and brokers multiple. Distributors can select what they want to be—agent or broker. Second, more complex products should require higher levels of certification. Retail pure-risk products such as term insurance are the simplest to explain whereas commercial or group insurances the most complex. Third, commission should be made uniform across years and not disproportionately high in the first year. Restrictions on earnings in pension and group life should be set at more reasonable levels. Fourth, the industry should self-regulate and create its own independent ombudsmen to adjudicate complaints fairly. This can be in addition to the Financial Redress Agency when that is set up.
There is considerable work to be done in developing the industry. China provides a good benchmark. Some of the insurance distributors that were set up in China over the past 15 years now sell more insurance than our insurers. Getting the regulations and distribution architecture right is the first step to embarking on that journey towards growth.