Insurance
Personal Finance Exclusive
LIC agents likely to recommend less suitable product: Harvard Study

A Harvard Business School study shows that LIC agents have an incentive to recommend more expensive and less suitable products to consumers. This especially hurts “low and medium income households (which) tend to trust the government insurance companies more than private sector firms”

Do life insurance agents recommend a high-commission product, which is against the interests of their clients? This has been the suspicion all along. And now a Harvard Business School study titled “Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market” by Santosh Anagol, Shawn Cole and Shayak Sarkar, confirms this.
 

The researchers sent trained auditors into the field posing as customers seeking insurance and then analysed the advice they received. The auditors’ meetings with agents revolved around life insurance, specifically two types of policies: term and whole life. The study found that agents from Life Insurance Corporation of India (LIC) are less likely to recommend a term insurance plan, when it is known that in many cases term plans are the best form of life insurance. The study suggests that the government-owned organisation does not encourage its sales agents to provide better advice and that government ownership does not appear to solve the problem of unsuitable advice.
 

Interestingly, the study says that consumers who signal sophistication by demonstrating some knowledge of insurance products get better advice. This result suggests that the worst educated consumer may suffer most from commission-driven sales behaviour. In short, the masses, who have a blind belief in LIC, equating it with government, are doomed to suffer the most.
 

According to the study, “Anecdotal evidence suggests that low and medium income households tend to trust the government insurance companies more than private sector firms, and the government firm might take advantage of this additional trust by pushing less suitable products. Another possibility is that agents employed by government firms are less knowledgeable about term insurance.”  
 

But, its not just LIC agents that are to be blamed. Agents overwhelmingly recommend unsuitable products, which provide high commissions to the agent. The study says, “Agents cater to the beliefs of un-informed consumers, even when those beliefs are wrong. Salesmen are unlikely to impart neutrality to customers even if they have strong initial preferences for products that may be unsuitable for them. In case of sophisticated consumers, agents recommend term policies on top of whole life insurance policies without substantially changing premium payments, as opposed to bringing fairness to the customer and recommending only term insurance policies.” In short, the amount of premium matters to agents as it solely determines the commission they earn at the end of the day.
 

According to the study, “Market discipline does generate neutrality; with agents perceiving greater competition they are more likely to recommend a suitable product.” Based on an experiment, the study concluded that increasing the apparent level of competition does lead to the agent attempting to bring fairness to the customer by offering term insurance. It also suggests that encouraging customers to shop around when looking for consumer financial products may be a simple way to improve the quality of advice provided by agents. While it is always desirable for customers to ask questions and shop around, Moneylife believes that competition, availability of more information does not necessarily mean better selection because of the similar behaviour by producers and distributors and also behavioural flaws of consumers.
 

The study concludes that “There is strong evidence that commissions-motivated agents provide unsuitable advice. Agents recommend strictly dominated, expensive products, 60%-90% of the time. Consumers who stated that they had an understanding of insurance products were 10 percentage points more likely to receive a recommendation that included term insurance.” The study found that agents gave correct advice in only 9% of the time; in the other 91% they recommend investment-linked products that are dramatically more expensive.
 

In the second part of the article we will give more information on insurance company and agents’ behaviour.

User

COMMENTS

sundarrajan

12 months ago

After 2 years, now with present data, once again I am giving you the feed back.
Most lapsed policies in the last 3 years Sum Insured is Term Assurance.
Most rejected claims are term assurance
More on line policies were term plan
Why don't you have a study regarding this
Sundarrajan

Ahmisaran

2 years ago

The most hilarious article of the recent times. Thanks for the fun shared.God bless them with more survey related laurels in their academics.

tony thomas

3 years ago

It is my personal experience and I agreed with agents recommend more expensive and low suitable policy. We should take expertise from different and after comparing with private and public we should take one. Process will take time even, but finally you can your best product as more info available here: oneworldcover.com

sudhir laturkar

3 years ago

I am a financial planner based at nagpur magharashtra.
problem is that most of the agents do this business as part time ,they just exploit relations.& people are also do not ready to pay fees

Kapil Mehta

3 years ago

The ethical issues described in this article are very valid. They are other dimensions of ethics that are also important. Read the blogpost http://securenow.in/blog/?p=98 for equally important ethical issues. It requires a great deal to wisdom to operate with the best interests of customers at heart.
Kapil Mehta

uban

3 years ago

Completely agree. Insurance agents would always advice against term insurance, "you wont get back any return, if you dont die you wont get paid".

I had to prepare excel sheet with premiums and return to illustrate to my friend how a simple combination of term with FD was much better than the so called return paying policies.

and the truth is most people buy insurance because they have heard previous generations buy it, or they have heard it helps save on tax. I know people with salary of less than 3 lacs buying insurance to to save tax.

REPLY

vineeth kumar

In Reply to uban 3 years ago

Good one.
Term Life Insurance at young age for max period + SIP or Even a ULIP of approx 5000/year too for a longer period.

You get a good SA maybe a Cr and with ULIP or SIP in the long run will keep you profitable.

But, unfortunately our guys utilize the warm relation to pitch in Money back, Jeevan Anand etc..

People who say ULIPS do not work need to Learn the basics. and not fall into the tricks of Agents.

I wud go for a ULIP even if the upfront loading is 30-40%.
Keep it active every year for the complete term (10/15 yrs).

Simple logic 25 yrs average CAGR of Indian Stock market 19.05% (recent I think its 17%)

Use Rule of 72 and see the Magic.

SATISH BHATIA

In Reply to uban 3 years ago

This is indeed a good idea to buy term policy..There is no match of it, specially when it comes to security.
But not every one can get it, as its too difficult to purchase term policy.Reason being T&C are very tough, In a Indian mkt. most of the clients are business oriented and dont have adequate ITR. Good Health condition is another need. To buy a good insurance cover financial documents are require. For salaried person it may be ok...
What i think is Term with endowment cover is a good investment. where you get security and maturity.
FD may give a good return than Endowment but it has one negative thing... when crises comes, we tend to withdraw FD first and all our future planning got dumped. Where as in endowment product one has to stick to it till maturity.

On the other side,investment in MF & share mkt, not every one has proper knowledge and risk apetite..

Term policies has a good mkt in Metros and mini Metros.. but what about cities n villages customer are not ready....

Satish Bhatia

SuchindranathAiyerS

3 years ago

Truly, Harvard is good at borrowing your watch to tell you the time! Any hapless Indian citizen who has had dealings with any India Government department or agency, and that includes LIC, UTI, etc would tell you that Governance exists to garner resources for the State to be applied exclusively for the personal pomp, pelf, pleasure and security of the ruling scum

Priya Joshi

3 years ago

I am sure it was a joint study by Harvard & MoneyLife, with the chief being Mr.Basu who for reasons best known to him is a crusader against LIC. LIC has 15 Lakh agents and over 20 Crore policyholders. I wonder how many policyholders of LIC did Harvard contact in order to arrive at this conclusion. In my opinion they should have contacted atleast 25% of the policyholders to arrive at a consensus. Now one can estimate what 25% figure of 20 Crore policyholders would look like. No knowing that this is not possible for Harvard researchers to do, we can atleast hope that they had taken the time to consult atleast 25% of LIC Agents posing as dummy clients in order to know whether they give the correct advise or not. Now 25% Agents again means that they should have consulted atleast about 3 Lac Agents to judge their skills.
Mr.Basu can you please clear my doubts by taking time off your busy schedule of propagating Stock Market investment to every citizen of India?

REPLY

Sucheta Dalal

In Reply to Priya Joshi 3 years ago

When ignorance is bliss....

Instead of being "sure" about anything -- the joint study, or what Moneylife "propogates", wouldnt it be better to spend some time looking at our reports, studies and initiatives?
Otherwise, how does one believe this same "sure"ness is not guiding your clients on policies to choose? Take a look at our insurance helpline too! Or our 18 odd cover stories on insurance by Raj Pradhan

GEO THOMAS

3 years ago

I dont know what is the fuss about, why are we so worried abt the survey, in what way its going to affect ur business, before anyone tells me to take rest let me tell my view, one of the member said lic gave 8.5% in 1973 for a 40yr policy guranteed, but i want to highlight how many client would have taken a sum assured of 50000/- very few would have paid 12000/- as premium, it is a big premium then, this are all rich and people wit black money, after 40 yrs the maturity they receive would not help in buying books for their engineering or mba or any higher education, i have many client who got the maturity and didnot buy lic for their son, i have seen a policy a pension plan from lic where my cluent is paying 10k and in his retirement he will get 8k monthly, that was a good plan but very few have got, i was surprised to see such a good policy has stopped long time back and the clients were not sold such good policy may be commission was less, reagarding ulip i still believe its better than traditional, the sad part is people in india have always invested in gold, realestate,FD as we feel it us safe, but i have many clients who hace been buying shares when they were young and today they are so rich they get so much dividened that also tax free, that is power of compounding, ulip unfortunately market was down for the last 6 years, u cannot judge ur policy in 6 years when u have bought it for 20years, all agents have sold it for three years, now when the market goes up ulip will give very good return if clients have taken the right product. We need help our clients acheive their goals for that i would say term with sip is tge best combination. For people who dont value money sell them traditionalplan as it wont hurt their financial plan.

REPLY

mohammed faisal

In Reply to GEO THOMAS 3 years ago

TO,
geo thomas

sir,

kindly request to you not 8.5% and not gurated return coments by mohammed faisal please again read carefully you are clearly given worong comments on my post please this not guranted return mohammed faisal said that person who had taken policy since 1973 june sum assurad 5 lac for 40 year term and premium rupee 12300/- and today at time of maturity get 32 lac rupee including( sum assured 5 lac & bonus & final bonus see or download orignal bonus chart from licindia.com web site to tally chart in mohammed faisal comments which was given 16 aug 2013 this is real data not example because lic advisor in public website prohabited to comments produt specific comments,

thanks
mohammed faisal ( insurance and mutual fund advisor )
jodhpur ( rajasthan )

GEO THOMAS

3 years ago

I dont know what is the fuss about, why are we so worried abt the survey, in what way its going to affect ur business, before anyone tells me to take rest let me tell my view, one of the member said lic gave 8.5% in 1973 for a 40yr policy guranteed, but i want to highlight how many client would have taken a sum assured of 50000/- very few would have paid 12000/- as premium, it is a big premium then, this are all rich and people wit black money, after 40 yrs the maturity they receive would not help in buying books for their engineering or mba or any higher education, i have many client who got the maturity and didnot buy lic for their son, i have seen a policy a pension plan from lic where my cluent is paying 10k and in his retirement he will get 8k monthly, that was a good plan but very few have got, i was surprised to see such a good policy has stopped long time back and the clients were not sold such good policy may be commission was less, reagarding ulip i still believe its better than traditional, the sad part is people in india have always invested in gold, realestate,FD as we feel it us safe, but i have many clients who hace been buying shares when they were young and today they are so rich they get so much dividened that also tax free, that is power of compounding, ulip unfortunately market was down for the last 6 years, u cannot judge ur policy in 6 years when u have bought it for 20years, all agents have sold it for three years, now when the market goes up ulip will give very good return if clients have taken the right product. We need help our clients acheive their goals for that i would say term with sip is tge best combination. For people who dont value money sell them traditionalplan as it wont hurt their financial plan.

mohammed faisal

3 years ago

ATENTION HARVARD RESEARCH TEAM !

CAN YOU GIVEN ANSWER FOLLOWING QUESTION ?

1.CATEGEORY OF POLICY HOLDER WHO NEED INSURANCE WHERE YOU SURVEY CONDUCT NOT DECSCRIBE BY YOU OUR MEANS CEATOGEORY OF NEW POLICY HOLDER WHERE YOU SHOW TO AGENT DURING BUYING POLICY OR WILLING TO BUY POLICY NOT DECRIBE BY YOU

SO KINDLY REQUEST TO YOU FIRST YOU SHOULD UNDER STAND THE DIFFRENCE OF PRODUCT AND REQUIREMENT OF TERM INSURANCE PRODUCT AND TRADITONAL PRODUCT AND WHOLE LIFE PRODUCT

ALSO BEFORE COMMENTS ABOUT LIC PRODUCT SHOULD ALSO COMPARSION TO PVT INSURANCE PRODUCT AT TIME OF SURRENDER OF POLICY AND SURRENDER CHARGES

FINALLY ALSO REQUEST TO YOU IN HARWARD SCHOOL MAY BE WELL EXPERT BUT IN INDIA AND SPECIALLY WE PROUD TO BE PART OF LIC INDIA IN MY 12 YEAR LIFE INSURANCE CARRER WE FACE ALSO MISSELLING BUT YOU MAY BE RIGHT ABOUT PRODUCT BASE BETTER THAN TRADIONAL BASE OF MORE COVER THAN SMALL SUM ASSURED BUT IN INDIA PUBLIC USE LIFE INSURACE AS PART OF SAVING INTRUMENT THAN SECONDARY LIFE INSURANCE PRODUCT THIS REASON BEHIND THAT AGENT SELL TRADIONAL PRODUCT RATHER THAN TERM PRODUCT,

1973 LIC GIVEN 8.15% CAGR RETRUN TO POLICY HOLDER WHO TAKEN POLICY FOR 40 YEAR TERM
IT MEAN WHAT EVERY INFLATION PEOPLE NOT GIVEN IMPORTANCE THEY NEED REGULARY SAVING WITHOUT ANY BREAK AND WITHOUT ANY RELAX IN STOP SAVING THEY WANT KEEP INVESTING MANTRA KEEP INVESTING WITH LIFE COVER AND DURING POLICY TERM ANY EMERGENCY THEY CAN TAKE LOAN FROM LIC OF INDIA NEXT DAY AND ONLY LIC OF INDIA CAN PROVIDE FAST AND PAN INDIA SERVCE TO LIC POLICY HOLDER WITHIN 48 HOURS YOU CAN GET 50% OF DEPOSIT AMOUNT OR 90 % OF SURRENDER VALUE AS LOAN THAT IS REASON

IF YOU NEED MONEY FOR

A.HOUSE RENOVATION
B.HOSPITALISAION/EMERGENCY
C.BUSINESS PURPUSE/STREET VENDOR NEEDS LABOUR NEEDS/SMALL FUNCTION / CHILD MARRRIAGE/EDUCATION LOAN/

WHAT EVERY NEED YOU CAN EASILY APPROACH TO LIC TO GET BACK YOUR MONEY WITHOUT BREAK OF POLICY WITHOUT BREAK OF RISK COVER ALSO YOU NOT GET 5 LAC ON 5 LAC POLICY YOU ALSO GET REVERSONARY BONUS AND FINAL ADDIONTAL BOUNUS WITH YOUR POLICY,
PERSON WHO TAKEN POLICY FROM LIC OF INDIA SINCE 1973 AND TODAY 40 YEAR THEY CONTRUBUTE REGULAR 12000 PER YEAR PREUMIUM TILL 2013 TODAY HE GET FOR 5 LAC SUM ASSURED POICY AS FOLLOWING REAL DATA SHOW THAT IS REASON LIC GEVEN NOT WILL GIVEN POLCIY MATURITY AMOUNT YOU CANT IMAGE NOT ONLY 5 LAC POLICY HE ALSO GET
ACCORDING TO LIC WEBSITE BONUS CHART HISTORY TODAY POLICY MATURED AND POLICY HOLDER GET SINCE 1972 TO 2013 JUNE FOR PREMIUM OF 12300 YEARLY WITH ACCENDENT COVER 5 LAC TOTAL 10 LAC 5 LAC NORMAL LIFE AND 5 LAC ACCIDENT AT TIME OF MATURITY 5 TIME OF DEPOSIT OF AMOUNT WHICH IS BETTER THAN PPF IF WE COMPARISON TO PPF WITH ENJOY LIFE COVER WITH INCREASE AS FORM OF BONUS YOU CAN CONSIDER RISK COVER INCREASE EVERY YEAR AS TERM COMPLETE YEAR BY YEAR YOUR RISK COVER ALSO INCRESE FROM 5 LAC TO 10 LAC 10 LAC TO 15 LAC BECAUSE YOU GET EVERY YEAR BONUS WHICH ADD IN YOU ACCOUNT THIS IS ALSO GIVEN AT TIME OF DEATH DURING POLICY TERM THIS IS ADDTIONAL BEHIFIT OTHER THAN 5 LAC SUM ASSURED

500000 SUM ASSURED TODAY
960000 BONUS SIMPLE
1775000 FINAL BOUNUS(3550*500)
--------
3235000 TOTAL 32 LAC AFTER 40 YEAR CAGR MORE THAN 8% THAT IS TRUTH TODAY LIC GIVEN TO POLICY HOLDER YOU YOU LESS INFLATION 6 % WHAT IS REMAING THAT IS NOT MATTER MATTER IS NEED REGULAR SAVING AND NEED REGUALR INCOME LIKE 6% CAGR WITHOUT ANY RISK AND ENJOY RISK COVER WITH MAKE HABIT TO WHOLE FAMILY TO PUT LITTLE MONEY ASIDE FOR FUTRURE PURPOSE,

THAT THINKING BEHIND IN INDIAN PEOPLE AS MY RESEARCH SHOW IN LAST MY 12 YEAR EXPERIENCE SHOW,

TERM PRODUCT NO DOUBT BEST PRODUCT FOR LIFE COVER FOR PEOPLE SHOULD TAKE FIRST THIS PRODUCT BUT MY EXPERIEC SHOW IN TERM PRODUCT AFTER SOME TIME POLICY LAPS BUT TRADIOTNAL PRODUCT BETTER INFORCE RATION THAN TERM PRODUCT WE ALSO CONSIDER THIS POINT DURING COMPARISON BOTH PRODUCT AND NEED AND IMPROTANCE OF INSURANCE PRODUCT TO INDIAN CUSTOMER,


--------


NATURE AND NEED OF CUSTOMER MAY BE NOT MATCH BUT FINALLY,

WE SHOULD ALSO REMEMBER 2004 TO 2011 SESSION WHERE EVERY WHERE AND EVERY EXPERT TALKING ABOUT ULIP AND FEATURE OF ULIPS AND COMPARISON OF ULIPS AND TRADITONAL PRODUCT V/S ULIP AND AFTER DEDUCT OF EXPENCE RETURN ON ULIP SHOW OVER 12% ON BULLS MARKET,
BUT TODAY EVERY BODY KNOW VALUE OF ULIPS AND NUMBER OF POLICY LAPS RATIO HARWARD SHOULD ALSO SHOW THIS DATA AND LAPS RATION OF THIS PRODUCT IN ALL INSURANCE COMPANY,

AND ALSO REQUEST TO HARWARD EXPERT PLEASE DATA SHOW ABOUT TERM PLAN IN LAST TEN YEAR AND TRADITIONAL PRODUCT DATA OF LAST TEN YEAR,IN % NUMBER OF POLICY STILL INFORCE,

CAN HARWARD AUDITOR WHO CONDUT SURVEY HOW MANY YEAR EXPEREIANCE OF LIFE INSURANCE INDUSTRY ABOUT NATURE OF INDIA GEOGRAPICAL AND INCOME SOURCE AND TYPE OF INCOME CATEGORY OF PEOPLE IN INDIA THEY CAN TAKE TERM PRODUCT OR NOT,

THANKS

MOHAMMED FAISAL
( MORE THAN 10 YEAR IN LIFE INSURANCE AND MUTUAL FUND INDUSTRY ADVISORY BUSINESS )
JODHPUR ( RAJASTHAN )342001




balakrishnan iyer

3 years ago

This is not Harvard it is India the LIC is a brand name which has paid all the Indian who are insured without failing like many of the private Banks no doubt LIC agents a very many lot have earned their livelihood through selling Insurance and made a honest name for themselves no body can predict profits even in Harward the economy of buyers and sellers market can bring profits, so let it be any Insurance people who keep the consumers trust can only survive and LIC does it till today even though the yeild is less, but never cheats.

yateen sheth

3 years ago

sir my point view is not against term plan today sold 60 lkhs term plan to my existing coustomer today but against pvt players who have foreign companies who have duped indian people hard earned money and took the coustomers faith for a ride.

GEO THOMAS

3 years ago

Any one can go, but the policy holder policy terms and condition is same as per irda rule, i dont know why people are afraid of one survey. Typical lic marketing, govt vs private, it was a simple survey, i know many lic and pvt insurance advisor, they all sell traditional plan, its not that they cannot convince the client to take term. Now they will tell u from october service tax is applicable on mortality premium, where do u give mortality , it would be peanuts, it also means the policy which will come after october will be of no use.

yateen sheth

3 years ago

earlier Tata AIG now Tata aia where is AIG gone,HDFC Standard where has Standard gone,Max new york life where is newyork gone,Amp Sanmar taken over by Reliance,Ing vysya Ing taken over by Excide,Aviva planning to move out of LIfe insurance business who is next

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