Asymmetry in life insurance selling

Introduction

The word ‘asymmetry’ refers to the absence of correspondence, equivalence or identity amongst constituents of an entity or unit resulting in imbalanced distribution of the elements. Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. In insurance parlance, this includes a situation where the insurer or the proposer possessing limited information about the essential ingredients for entering a contract of insurance. This article discusses this asymmetry in the area of life insurance selling.

Information asymmetry for a life insurer absence of accurate information about the proposer to assess the risk correctly

(a) Why should an insurance company need to have accurate facts about the proposer?

Life insurance contracts are contracts of ‘utmost good faith’. The proposer (life to be insured) is expected to reveal the state of his health, personal history, family history, occupation, income, etc in a truthful manner so that the life insurance company is able to fix the premium appropriate to the risk on hand. This disclosure is required to be done in the proposal form designed by the company which is signed by the proposer.

(b) Asymmetry in the process of life insurance selling

While the proposal form is signed by the proposer, it is invariably filled by the agent. In most cases, the agent does not take extra care to bring it to the notice of the proposer the nature of the life insurance contracts, the need for truthful disclosure of the facts, especially on the personal health and the consequences of non-disclosure of health, even if unintentional.

The agent fills the form answering questions on the status of health in the negative (he ticks ‘no’ to the questions enquiring about illnesses, if any of the proposer) without checking with or informing the customer. In view of the above, the proposer ends up signing the proposal form without even knowing that he is signing on a health declaration.

Life insurers accept the risk based on statements and disclosures made in the proposal form. Where a claim is preferred by the nominee upon the death of the life assured, the company conducts investigation of the claims (usually by an independent professional investigator) who conducts enquiries in the hospitals, clinics where the life assured underwent treatment for the illnesses before the date on which the proposal was signed. Copies of treatment records are produced to conclusively prove the fact that life assured was suffering from illnesses.

On the basis of the above records, life insurers repudiate claims stating that the life assured had failed to disclose the status of health correctly in the proposal form which had impacted the decision to accept the risk (violating the principles of utmost good faith), warranting repudiation of claims. Where ‘customer fraud’ is proved, insurer can forfeit the premiums also. Therefore, ‘knowledge’ of the customer about the ailments is also established resulting in forfeiture of the premiums paid by the policyholder.

The result—nominee does not get the intended benefits—the purpose for which life insurance cover was taken—loss to the customer.

Insurance company’s reputation is at risk—so is the reputation the advisor in the market—since the benefit promised is not paid—whatever be the reason.

The irony of the situation is that the customer ‘did not know’ that he needs to disclose and therefore did not disclose about him correctly, but insurance company repudiates the claim on the presumption that life insured had knowledge about the contents of the form before he signed.

We may think that it is the duty of the proposer to read the proposal form before signing it. Further we may also conclude that the proposer should have read Section 45 of Insurance Act which is printed in the declaration part of the proposal form and cannot therefore take advantage of his own ignorance.

Though the declaration contains a sentence confirming that the proposer confirms what is stated is true and that benefits may not get paid if there is any misstatement, how many proposers read and relate it to the importance of proper disclosure on health questions? Does the agent sensitise the proposer about its importance?

Life insurance is not like buying mutual fund where there is a risk of only losing the capital. While it is a widespread knowledge that persons’ trading in equity markets take the risk, hardly investing public knows the nature of insurance contracts.

How many of us have really understood the importance of Section 45? A lengthy section which even legal experts take years to comprehend it completely. How do we expect a common man to understand? How many of us have read the housing loan agreement completely and understood the implications before signing it? We end up signing all pages of the book containing the loan agreement without reading it. While you do not end up losing much if you do not read a loan agreement, it is not the so in the case of life insurance.

One may think that keeping in view that the agent acted as the ‘agent of the insurer’ if the agent filled questions on personal health of the life assured without checking with him, it is the insurance company who should take responsibility and should pay the sum assured.

Well, logically you may be right, though not legally. There are sufficient judicial precedents (Hon’ble Calcutta High Court, Suit No. 1073 of 1956 in the matter of Mrs. Maniluxmi Patel and Another Vs. Hindusthan Co-operative Insurance Society, Ltd. and Another) to confirm that insurance company’s agent acts as ‘agent of the proposer’ while filling in the proposal form.

Therefore, the poor proposer’s family will have to pay for the lack of foresight on the part of the agent on the consequences of not taking ‘care’ while form filling.

The agent is mostly driven by the thought that disclosures of facts of the illnesses of the proposer in the form could result in declinature of the proposal by the insurance company resulting in ‘loss of commission’ to him. But little does he realise that by doing so, he is failing to cover the ‘risk’ under the life insurance policy for which he is receiving the commission.

The problem compounds where the customer is illiterate or does not know English and the vernacular declaration is signed by the agent—a situation of high degree of conflict of interest. 

Most of the repudiation of claims happen today due to the above information asymmetry. Had the proposer known about the importance of proper disclosures, he could have even afforded to pay some extra premium and get the claim amount, rather than not disclosing it and let the benefit go.

According to the IRDA journal, in 2007-08 under individual death claims, the total number of policies repudiated by the life insurance industry was 9,027 and the amount repudiated was Rs. 1.52 billion. Under group death claims, the repudiation was in respect of 1,241 lives for Rs.183 million.

What do we do to correct the above information asymmetry?

The need of the hour is creating awareness by the insurers at the proposal filling stage amongst their agents, field officers and the investing public. Insurance companies should take special efforts to bring the importance of faithful disclosure to the notice of the customer by any of the following ways:

Any important compliance is best achieved through a process redesign—Highlighting the questions on personal and family health—so as to catch the attention of the proposer—can consider separating the critical questions to a separate sheet like benefit illustration with appropriate disclosures

Need for proper disclosure norms for agents—all insurance companies should mandate that insurance agents need to compulsorily disclose about the nature of insurance contracts to the prospective customers

Customer calling to confirm the health status—at least on a sampling basis

Printing proposal forms in all the major regional languages

Till such time proposals forms are printed in vernacular, agents should not be allowed to sign vernacular declaration—an independent person can do it

Emphasising the importance of proper disclosure with case studies in the agents’ training —clearly highlighting the consequences of non disclosure

Strict disciplinary action where agent has failed to do his duty—including termination for repeated cases of non disclosures

Promotion of customer awareness programmes by IRDA highlighting the importance of proper disclosures while buying life insurance

Asymmetry due to other factors at the point of sale

The other major contributor to the asymmetry at the selling stage is the absence of the correct knowledge about products, features, etc and mismatch of expectations of the customer and benefits and other features which satisfy the customer’s requirement.

Life insurance products fulfill customer’s need. Therefore, the first step is an understanding what the customer’s requirements are and recommending a product which fulfills the need. If this does not happen, it results in an asymmetry between what the agent sells and what the customer’s expectations are.

The agent should never be driven by the products which offer him maximum commission. He should recommend products which satisfy the customer’s needs. We often come across complaints where the customer required a single premium product, whereas the agent had recommended a regular premium product—the primary driver in the instant case is the commission rate—while for single premium it is 2%, it is around 15% for regular premium products. The result is that the customer cancels the policy or lapses it.

Further the other major area of complaints relate to wilful ‘misrepresentation’ by agent to the customer on product features. False guarantees on returns on insurance products, not informing about risks, charges etc. fall under this category.

The mismatch between customer expectations and product features is the key reason for the asymmetry which results in increased complaints of ‘mis-selling’.

What can we do to correct the asymmetry related to mis-selling

Insurance companies may consider prescribing voluntary standards of disclosures by Agents to prospective customers. This shall prescribe what should be disclosed by the agent to the prospective customer on:

• Benefits under the policy
• Terms and conditions, including exclusions like ‘pre-existing illnesses’, waiting period clauses, etc
• Should specifically confirm that he has explained the health related questions to the customer and that the proposal form is filled up as told by the customer
• Should confirm that he is satisfied that the policy recommended suits the customer
• Customer call back on a risk based sampling basis to confirm the understanding on risks, charges and guarantees under unit linked products
• Developing ‘mentor’ agents within an insurance company who shall act as guide for other agents for developing ‘professionalism’ in the agency business—they should share the secrets of their success including the need for following ethics and compliance in insurance business
• Insisting on customer service by Agents as a key to the success and promoting ownership of the agency business—there are many LIC agents who maintain policyholder service centres and achieved success through enhanced customer service—clearly promoting the opposite of ‘disservice’
• Compensation to agents to be driven not only by quantity but also by quality of business the agent brings in, while a fixed basic commission may be given to all agents, flexibility for additional paying additional remuneration only if the complaints ratio is maintained within limits by the agents
• Promotion of ‘rewards & recognition’ program for agents whose quality of business is maintained at a high level.

The author is the vice-president (compliance) of Bharti-AXA Life Insurance. The views expressed herein are his personal views and should in no way be deemed to be the views of Bharti-AXA Life Insurance or any of its associate companies.