Murky cover: Chain-selling of insurance products thrives despite IRDA restrictions
Moneylife Digital Team 13 May 2010

In the absence of any clear-cut guidelines from the regulator or the government, insurance products are being sold under MLM schemes

Insurance products are being sold under multi-level marketing (MLM) schemes by constantly luring unaware clients. However, the regulator, the Insurance Regulatory and Development Authority (IRDA), is busy fighting a turf war with market regulator Securities and Exchange Board of India (SEBI), giving a free hand to these dubious, fly-by-night operators.

In the absence of any clear-cut guidelines from the insurance regulator or the government, MLM schemes are being used to peddle insurance. IRDA, the industry association and the government don’t seem to have the time to look into these murky chain-marketing schemes.

According to Section (42) of the Insurance Act, 1938, appointing sub-agents and passing on commission or kickbacks is prohibited. In an email to Moneylife, IRDA's executive director A Giridhar said, “Selling insurance through unlicensed persons is illegal and we will act on the information provided by you.” In addition, IRDA certification is mandatory for selling insurance products.

However, peddlers of MLM schemes in insurance products are coming up with new ways to cover up their shady activities. One such company is Team Life Care Co India Pvt Ltd, a corporate agent of Bajaj Allianz Life Insurance Company Ltd. (read more

Despite clear evidence of an MLM scheme being used to sell its products, Bajaj Allianz denies the very existence of such operations. Santosh Balan, head, corporate communications, said, “Bajaj Allianz General Insurance solicits business only through approved and specified persons. All our agents are strictly advised to follow all regulations and procedures while soliciting business. If we find anyone violating any norm or regulations, we will take strict action against them."

There are two different views on using MLM to sell insurance products. While the regulator clearly says that selling insurance through unlicensed persons is illegal, the Life Insurance Council is not sure about it. Earlier, SB Mathur, secretary general of the Life Insurance Council told Moneylife, ”There are a couple of insurance companies that have a multi-level set-up, who have licensed agents and who use authorised people to sell products and some of them are doing a good job. But IRDA is quite alive to this and has recently taken some steps to ensure that MLM is not misused.”

“If there is an MLM structure where the company has a number of authorised representatives to sell insurance to people who are buying policies, then an MLM scheme could give strength of distribution. If there are no licensed representatives selling insurance, then it (the company) should be denied the right to sell. It is as simple as that,” said Mr Mathur, who is former chairman of the Life Insurance Corporation of India (LIC).

Here is seems that Mr Mathur, a veteran in insurance, is just looking at the ‘sales’ side of these MLM schemes. From his statement it appears that he may not be aware about the fraudulent ways in which an MLM scheme works. All companies in the MLM field form a pyramid structure wherein the agent, business partner, distributor or salesman, whatever you call him, gets in new recruits, who in turn also recruits new people and it goes on to form a chain. Unfortunately, this chain structure is not a straight one. The new recruits are divided into binary or spill lines. Here the whole MLM edifice can come crumbling down.{break}

For example, if you join an MLM scheme, you are required to get two more people under you. Similarly, these two people also have to recruit two people each under them and after that your structure becomes complete and you are eligible to receive some income. However, in case one person from your team fails to recruit two people under his line then your structure remains incomplete and you may not receive a single penny as income. What is stunning is that depending on the MLM scheme, people who had joined under your line may be diverted to someone else’s line, if your line remains inactive or does not recruit more people. This is why so many people have lost or are losing huge amounts of money under MLM.

Moneylife has been writing on the rampant use of MLM for selling insurance products by insurers. Insurers like LIC, Bajaj Allianz, Reliance General Insurance or their agents are running MLM schemes for selling more policies. Nevertheless, nobody except Bajaj Allianz bothered to reply to our mails until writing this story.

In addition, insurance companies are also targeting independent financial advisors (IFAs) with lucrative offers for referring their high net-worth clients for various insurance products. A few IFAs have told Moneylife that they would rather stay away from such proposals, as they value a long-term client relationship more than the prospect of a quick buck.  

Earlier writing in, S Ananth, who has been studying chain schemes in Andhra Pradesh, in an article titled ‘Harmless fraud’ says, “A clear-cut case of violation of the laws relates to schemes that distribute insurance policies on behalf of various private insurance companies. Any person desirous of marketing insurance policies has to pass an exam conducted by IRDA. Only corporate agents or brokers (registered with IRDA) are allowed to pay commissions.

Companies actively involved in marketing insurance schemes include TLC Insurance (India) Pvt Ltd (TLC), RMP and Amway, among others. These details indicate the nature of harmless fraud and also the frequent testing of the frontiers of economic law by such companies in order to gauge the reaction of the agencies of the State. The lack of reaction by State institutions, or even tacit approval, is likely to gradually lead to calls to formalise these activities at a future date.”

IRDA, whose job is to regulate the insurance sector, is saying that it is looking into MLM schemes used by insurance companies to promote sales. However, in practice, the regulator is turning a blind eye on MLM operators and insurance companies. Similarly, the industry association is not sure whether to call MLM unauthorised or not. Nevertheless, the way both MLM companies and insurers are operating, there are good chances that MLM in insurance may be legalised.

About a dozen countries have banned any kind of MLM scheme. However, in a country like India, in the absence of any clear policy and regulation, companies that can fix the system by roping in influential officials thrive and grow till complaints start flowing in. However, this happens only when the MLM scheme is getting ready to collapse. Whether the rampant selling of insurance through MLM will be banned or legalised in India, only time will tell.

chandan kumar
1 decade ago
so much happenings in the country, then why dont govt. make some regulatory to stop luring the innocent people
1 decade ago
prakash anveri
1 decade ago
i requested you sir please display our policy location and chain support stage
Tapas Chakraborty
1 decade ago
The is a menace that has developed due to the apathy of the regulator to restrict such business structure and none punishment of the insurance companies for patronising such schemes. The MLM schemes are rampant in the small towns, semi-urban and rural areas
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