29 August 2009

Insurance - some honest confessions

It was refreshing to see some honest talk by an insider about insurance policies in today's WSJ. I have often blogged about the extortionist commissions (upto 40% according to this piece - anything in excess of 2.5% is excessive in my opinion, particularly if it is a mutual fund being sold in the garb of an insurance policy) and widespread mis-selling which exists in the area. In IRDA, the insurance regulator, we clearly have the worst regulator in India - ever. I have advocated in the past that SEBI should take over these mutual fund products' regulation - let there be two regulators for the same product - it is by no means a novel concept - many products have more than two regulators e.g. corporate bonds, gold certificates.

See here for the full story. Excerpts:

"After studying mysterious subjects like Nano Technology and Robotics, I asked him why waste life selling insurance policies? My son sounded determined. A bachelor's of engineering degree is for social acceptance, but for making a living, nothing beats insurance sales as a vocation.


After all, no salesperson of any other industry can boast of being part of a Million Dollar Round Table and get freebies like all-expenses-paid holidays and expensive gifts like Mercedes cars just by selling a few more policies. Compare this fun with the grime and dirt he would have to deal with on a shop floor if he chooses to take a job as an engineer!


He reasoned, after all, that the whole business of life insurance is dealing with life and death: Pure metaphysical occurrences that are pre-engineered by God. In the blurred boundaries of mind and matter, if he is a student of physics, he can be an agent of metaphysics too. The lip-smacking commissions of 40% on policy sales may just be extra levers to drive his motivation.

How many young people are as wayward in outlook as my son?

Just a glance at the education profile of my colleagues in the industry convinced me that my son is not an odd man out. Graduates from premier colleges of engineering and management – IITs, IIMs and even Ivy League schools like Harvard -- ended up in the insurance industry, selling or mis-selling insurance policies.

The fundamental problem is not selling but mis-selling insurance as a wealth creation opportunity. I have heard bank customers being sold policies as bank fixed deposits and stock brokers selling insurance as equity shares. Worse are multi-level marketing networks that sell policies to their unsuspecting members as an investment that helps them multiply their returns by roping more into the chain. Is mis-selling getting rampant because everyone wants to jump on the gravy train?"

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