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

LIC agents likely to recommend less suitable product: Harvard Study

Moneylife Digital Team | 12/08/2013 05:11 PM | 

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.

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Ahmisaran 1 year 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.

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tony thomas

tony thomas 2 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:

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sudhir laturkar

sudhir laturkar 2 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

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Kapil Mehta

Kapil Mehta 2 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 for equally important ethical issues. It requires a great deal to wisdom to operate with the best interests of customers at heart.
Kapil Mehta

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uban 2 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.

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vineeth kumar

vineeth kumar 2 years ago in reply to uban

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.

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SATISH BHATIA 2 years ago in reply to uban

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

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