A Harvard Business School study on Indian life insurance market suggests that hiding information may be an important part of life insurance agents' sales strategy, which is actively encouraged by insurers
A Harvard Business School study found a range of wildly incorrect statements made by agents on term plans, such as: “You want term: Are you planning to killing yourself?”, “Term insurance is not for women”, “Term insurance is for government employees only.” One agent even proposed a policy that he described as term insurance, which was, in fact, a whole life plan.
The study titled “Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market” by Santosh Anagol, Shawn Cole and Shayak Sarkar, portrays life insurance companies and their agents working in tandem to keep the consumer away from the right insurance product – term plan – by such deliberately misleading statements. The researchers sent trained auditors into the field posing as customers seeking insurance and then analyzed the advice they received. The auditors’ meetings with agents revolved around life insurance, specifically two types of policies: term and whole life.
In another experiment, the study found that requiring disclosure of commissions on one particular product led to that product being recommended less. This result is interesting since it suggests that hiding information may be an important part of life insurance agents' sales strategy and that the disclosure requirements can change the optimal strategy of agents. In this case, the disclosure requirement on one product pushes agents to recommend more opaque products. The results suggest that the disclosure requirements for financial products need to be consistent across the menu of substitutable products.
According to the study, “Life insurance companies may not have an incentive to educate consumers about how term life plus savings is better than whole life insurance as it may cause consumers to save with banks as compared to saving with life insurance firms. This loss in savings business for life insurers may outweigh the benefits of higher term life insurance sales.”
The study says, “If there is a true demand for investment-linked products, it is surprising that an insurance company has not won a substantial amount of business by offering a better whole life insurance product (i.e. by paying compounded bonuses, charging lower premiums, or both). One explanation for this scenario may be the presence of stiff competition for targeting the same market, irrespective of the quality of the product. In this case, the products that have the highest sales incentives will sell and any particular insurance firm will have an incentive to pay the highest commissions on the highest profit products.”
The findings of the study are consistent with anecdotal evidence from discussions with their auditing team: agents typically start the life insurance conversation by estimating how much the individual can afford to put into life insurance per month, rather than determining how much risk coverage the customer needs.
The study concludes that whole life insurance is economically inferior to a combination of investing in savings accounts and purchasing term insurance. Despite the large economic losses associated with investing in whole insurance, the study finds that life insurance agents overwhelmingly encourage the purchase of whole life insurance.
Approximately 20% of household savings in India have invested in whole life insurance plans according to IRDA. Agents’ behaviour is extremely important in this market, as approximately 90% of insurance purchasers buy through agents.