Page 52 - Insurance Times February 2016
P. 52
Conflicts of interest hurt the
business of insurance
B usinesses deal with conflicts deposit rates. The simplistic solution, further reduces the independence of
of interest routinely. Most sometimes put forward, is to have buy- loss assessment.
such conflicts are harmless. ers pay the fee to the agent rather than
The worst outcome of a the insurer. That would be disastrous A second conflict of interest is that the
pushy, incentive-driven salesperson is because the discussion on fees gener- central government, which promotes
that like P.G. Wodehouse’s Bertie ally results in postponement of an in- the largest insurers in the country, also
Wooster you, too, may end up with hor- surance purchase, and there is no evi- supervises the insurance regulator. Life
rible purple socks never to be worn. In dence that the outcomes will be Insurance Corp. of India (LIC), the larg-
some cases, though, conflicts of inter- better. est life insurer with a market share of
est are harmful. 70%, is fully government-owned. The
With the exception of the UK, no big four general insurers account for over
For example, if a hospital recommends market has implemented this concept. 50% of general insurance sales. These
unnecessary surgery to make money or A better way to address this conflict of are dominant market positions.
a bank forces you to buy life insurance interest is to structure commissions such
instead of getting a fixed deposit be- that an agent is neutral to the product The government’s control on the regu-
cause insurance commissions are higher. sold. She should earn as much selling lator exists because it is responsible for
The insurance industry has its fair share term insurance as a unit-linked insur- appointments and, according to law, has
of such conflicts. Some of these dilem- ance plan (Ulip) or traditional insurance. the last word on insurance regulation.
mas are well understood but a few are Because premiums of pure risk insur- A recent report indicated that the fi-
not. The conflicts have one thing in com- ances like term plans are so low, this nance ministry has asked the Insurance
mon—they weaken insurance delivery. may require commission rates on pure Regulatory and Development Author-
risk to be increased. ity of India (Irdai) to reconsider its order
The most visible and discussed conflict to SBI Life Insurance Co. Ltd to pay Rs.84
is that commission to insurance agents The incentives issue also creeps up in crore to certain group insurance
skews their client recommendations. the role of the surveyor for general in- members.
Because commission varies by product surance claims. For many claims, a sur-
and is linked to premium, an agent of- veyor is required to make an indepen- I’m not commenting on the merits of
ten makes most money when she sells a dent loss assessment that forms the the case, but if the news item is true,
high premium investment product in- basis for claim payment. there is an obvious conflict of interest.
stead of a more relevant and cost-ef- Many regulatory changes that are
fective term cover. However, in practice, the surveyor is needed will impact state-run insurers
appointed and paid for by the insurer most. For example, making returns on
This is why agents push traditional in- and is loyal to the insurer. Increasingly, traditional insurance transparent and
surance where they earn over 25% com- insurers are doing away with using an comparable to other financial products
mission even though the effective re- independent surveyor and depend upon impacts the dominant state-run insurer
turn on these products is less than fixed their own in-house assessments. That first. The regulator should be unfettered
52 The Insurance Times, February 2016
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