FDI in Insurance - II: Will the customer be treated fairly?

With the mushrooming of insurance companies and growing competition there is a pressing need to protect the interest of the consumer, and this should take precedence over raising the FDI cap

The government is hell-bent on attracting FDI. While this may be important, of far greater importance is preventing the insurers from taking the customers for a ride. This is all too common given the mushrooming of insurance companies and growing competition among them, as also poor financial literacy. What needs to be done?

The first sentence in the mission statement of IRDA reads as under: “To protect the interest of and secure fair treatment of policy holders...” In deference to this objective, IRDA should take the following steps to protect the interest of insured and ensure fair treatment of all policy holders.

1. Spread financial literacy

The foremost job of IRDA is to spread financial literacy in the varied forms of insurance among the people of our country. Insurance is a tricky business and people can be easily conned by false promises and vague statements, which can only be countered by educating the people in the intricacies of insurance. This is no doubt a tall order, but the way in which Moneylife Foundation has been continuously holding seminars on the subject of insurance without any entry fees, shows that where there is a will there is a way. This selfless service rendered by Moneylife Foundation without any expectation of reward is a shining example as this is the only NGO in the country which has been doing yeoman service in the area of spreading financial literacy in a manner that deserves to be replicated in all parts of our country in a big way. Though education is not the only panacea for all the ills of the industry, IRDA should take up this issue of education as a challenge by mandating a compulsory involvement of insurance companies in this unenviable task of educating the masses, which will not only serve the interest of investors, but also serve the cause of insurance industry admirably.

2. Introduce stringent penalties for mis-selling

Mere education is not going to solve the problem of our people because of intricacies inherent in the insurance business. The biggest bane of this industry has been mis-selling. In the good old days we had insurance agents, who understood the delicate balance between human emotions and material gain and gave correct advice to the potential customer, unmindful of any discomfiture to themselves. They were like family physicians, and took care of the needs of their customers with utmost care and sympathy, guiding them all through their life from issuing the policy till its maturity. But their breed is totally extinct today. The agents of today are totally oblivious to others’ pain as they are short-sighted and seek instant gain, instead of developing long term relationship with their clients. 

In view of this changed attitude, IRDA should introduce stringent penalties for mis-selling, and impose exemplary punishment which serves as a deterrent against repetition of such wrong doing in the future. IRDA should ensure highest standards of corporate governance by all the players in the industry, and should not hesitate to levy hefty penalties on the recalcitrant players, on the lines of what Competition Commission of India did recently in the case of cement companies. The insurance ombudsmen should be armed with more powers to penalize companies against genuine public complaints and provide the much needed support to the innocent and helpless public in times of need.

3.  Interest from date of happening of the event covered by the policy

One of the most reprehensible actions of insurance companies is the delay in settlement of claims on flimsy grounds which creates uncertainty in the minds of the insured. Though there are certain guidelines by IRDA that undue delay attracts payment of interest, none of the insurance companies pay any interest on their own, knowing fully well that people rarely fight for non-payment of interest. The delaying tactics are practiced by every insurer and more so by the health insurance companies, whose agents, namely “Third Party Administrators” are the major culprits in this game. 

If you strictly go by the principles of insurance, the insured amount becomes due on the happening of the event covered by insurance, like death, accident, etc.  In order to totally eliminate this tendency to delay payment of claims, IRDA should make it mandatory for all insurance companies to pay interest on all claims from the date of happening of the event covered by the policy, without any demand by the claimant, in the routine course of settlement of all claims. The interest rate should be high enough to discourage delayed settlement of claims and IRDA should come out with rating of companies on the basis of prompt settlement of claims. This will be the biggest reform in the insurance industry and will be a great source of comfort for the insuring public, as they can rest in peace even when they leave this world for good.


4. Set up a policy holders’ protection fund

Investing up to 49% equity by a foreign insurance company is no guarantee that the joint venture company will be able to meet all its obligations when the policies fall due for payment. Insurance is a business that lasts for a long time, and nobody will be able to judge whether the insurance company will continue to be financially sound to honour its commitments on the maturity date of the policy. Despite all the regulations, the biggest insurance company in the world, the US insurance giant AIG would have gone bankrupt, putting millions of policy holders in distress, if it was not bailed out by the US government during the financial turmoil of 2008 and this can happen anytime anywhere in the world.

In order to protect the policy holders in the event of bankruptcy of any insurance company in India, there is a need to promote an independent “Policy Holders’ Protection Fund”, and this should be set up on the model of Deposit Insurance Corporation of India which has been constituted by RBI to meet the eventuality of banks going bankrupt in the country. IRDA should take the lead in setting up this fund from the contributions to be made by every insurance company as a percentage of the premium collected by them, and this should serve as a fall back to meet the claims of policy of holders against any company in default any time in the future. The need for such a fund is now more than anytime before, as all type of insurance companies, big and small will be vying for a share of this growing market by resorting to all sorts of gimmicks and it is the primary responsibility of IRDA to protect the interest of the policy holders as enshrined in their mission statement.

It is needless to emphasize that whatever be the percentage of FDI that will be allowed in the insurance sector, the need for reforms as aforesaid are a desideratum and there is no gainsaying the fact that the government and the IRDA should not delay taking these vital steps necessary to protect our people from the clutches of those insurers waiting in large numbers to pounce on the illiterate masses of our country when India extends a red carpet to welcome them with (49%) folded hands.

(The author is a financial analyst and writes for Moneylife under the pen-name ‘Gurpur’)

nagesh kini
1 decade ago
The biggest bane of Mediclaim has been the induction of the so-called Third Party Administrators who apparently are not answerable to anyone incl.the IRDA.
They act like they are the Kings of all they survey. Their phone lines are never accessible to record the initial information. Reject claims on frivilous grounds incl. not informing in time and alleged delays in submissions.
TPAs don't have qualified staff to process claims - under qualified BAMS,DASF and Homeos not aware of anything handle.
TPAs collect hefty 'on-account' advances from Insurance companies, play along with this money as their float, part with only a small portion to the service providing hospitals and insureds.
TPAs, in effect, get money to reject claims - a great incentive.
A couple of years back the New India in a RTI response said that they had paid TPAs Rs.28 crores! For what - harassing the insured?
Baldev Raj Khanna
1 decade ago
I am an insurance consultant having 35 years experience in the insurance sector with 27 years active service in the PSU as an officer in the senior position. After a long gap I read the impressive and accurate comments. I fully agree with the views expressed by you.
Stephen Rosling
1 decade ago
This is a great opportunity to learn from the mistakes of the UK. Only now is the "oil tanker" of financial services greed and mis-selling starting to slow down.
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