Trust deficit in insurance sector

Disillusionment with the insurance sector has been growing. This raises a question whether the liberalisation of the insurance sector has uplifted the prospects of insurance as a protection-cum-investment tool and whether the entry of foreign insurers has improved penetration rates. The penetration rates of insurance in India are far from satisfactory which means opening up the sector has only resulted in shifting the business from nationalised insurance companies to private companies.

While private insurers and those banks that have forged alliances with foreign insurance companies have used every marketing trick in the trade to acquire customers, the insurance industry today has become an industry where the trust deficit is substantially high due to rampant mis-selling.

Walk into any branch of State Bank of India, HDFC Bank or Axis Bank and request for a fixed deposit form –within no time, someone in the branch (an assistant branch manager who has been given targets) will insist on a dialogue with you – “Why do you want to invest in fixed deposits? Why don’t you invest in a guaranteed plan?” If you probe a little further, the penny will drop that they are referring to an insurance scheme with an investment element in it. Do these bank officials really know the scheme? Have they understood the clauses? Have they done some homework?

Some of these bank officials will flash brochures of these schemes and explain to you that rest assured these schemes would fetch a return of anywhere between 13-18%. These officials would conveniently forget to add that these returns are subject to risks. Most of us have not forgotten how a private insurance company sold a senior citizen a scheme and collected a one-time premium of Rs.50,00 only to deliver him Rs 280 as the final maturity amount a few years later. I have also faced losses when I was sold a policy. After seven years, I simply got the principal amount back. Market risks were blamed for the poor returns. This was supposed to be a fund for funding the education of children.

This is the reason most investors squirm at the very mention of insurance. All the claims of insurance as a protection tool turn hollow with such rampant misinformation and mis-selling. The nationalised insurance companies didn’t render great customer service but at least they did not suffer a trust deficit from customers. When you purchased a life insurance policy from LIC, you were assured that you would get some benefit out of it. Today, that kind of assurance appears to have become a far-fetched dream.

This leads us to a question – should we revisit the insurance business model as such? The idea of collecting premiums from a large number of people to pay the claims of a few may have sounded logical years ago. Today, with frequent bouts of economic recession, lay-offs and salary cuts, it is unfair to expect customers to part with their hard-earned money to buy insurance policies that may not guarantee returns that they promise while marketing the product. Financial experts are now arguing that every individual should build his own corpus and keep aside certain sums of money as a means of self-insurance.

Well, the moral and morale hazard in insurance continues to plague the sector but the trust deficit engendered by ostentatious claims by private insurers in India has made customers shun buying insurance altogether. This decision is most often a result of prior adverse experience. This is akin to throwing out the baby along with the bathwater. It is also prudent for an individual to ask, “Why are insurers constantly calculating claim ratios as a performance metric?” On one hand, insurers offer to protect an individual from risks and on the other hand, they want to limit their claims. In fact, claims are considered as “losses” by insurers and premiums are “incomes”.

There is an urgent need to clarify all these terminologies as the millennial and Gen Z population may take umbrage to the fact that the money paid by them as premium is considered an income and the money that the insurance owes them as part of contractual clauses is considered a loss. This is the reason the concept of insurance per se needs to be upturned.

Excellent customer service is a great differentiator but not many insurance organisations can stake claim to having raised the bar on their service standards. Most of the efforts by insurance organisations are directed towards soliciting customers to buy an insurance policy but when it is a question of claims management, a slew of performance measures emerge from nowhere. Private Banks and private insurers have added to the chaos through their shambolic efforts to acquire customers at any cost. There is a lot that needs to be done from a regulatory perspective.

(The writer works as Associate Professor in Presidency Business School, Bengaluru)