Poor Insurance Advice in India

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Prior research has established that agents tend to sell the financial product that will pay them the highest commission.  A new study on India’s life insurance market advances the ball by focusing on the quality of one high-commission product agents recommend and concludes that it’s wrong for the client.

The researchers sent trained auditors into the field posing as customers seeking insurance and then analyzed the advice they received.  The auditors’ meetings with agents revolved around life insurance, specifically two types of policies: term and whole life.

In a term policy, the individual pays a premium to ensure a set dollar amount goes to a surviving wife or children if the customer dies.  Like term policies, whole life policies also cover the risk of death, but insurers charge a higher premium to provide an additional service: the extra premium is invested on behalf of the client, who accumulates a cash balance that he can later redeem.

The researchers said term insurance is much more valuable, if customers in India take what they save on its lower premium and invest in the government’s savings certificates, earning a higher return than they would get from the insurance company.

Yet the researchers found that just 5 percent of the customer-auditors were advised to only buy term policies when that’s what best suited their needs.

In the real world, customers wouldn’t necessarily invest the money they’d save buying a term policy.  One potential advantage of whole life is that it requires an advance commitment to saving money.  But low demand for a different type of financial product with a commitment device – commitment savings accounts – indicates that consumers don’t put much value in this feature.

The study comes amid debate in this country about whether a fiduciary standard should be imposed on brokers who sell stocks, bonds and some insurance products to clients.  A fiduciary standard would legally require them to put the client’s interests first, supplanting the current “suitability” standard, which states that brokers “must have a reasonable basis to believe” that a product they’re recommending suits the client.

This new research indicates that, at least in India, what agents sell doesn’t always match up with what the customers should be buying.

Click here to read the study by Santosh Anagol at Wharton and Shawn Cole and Shayak Sarkar at Harvard.

D. Gardner

As a licensed agent who tries to do right by the client, I have to cringe a bit when I read these stories. It is a competitive world out there, for starters. Real competition should be enough to assure access to the best products and prices.

One problem with a fiduciary standard for all is it opens up agents to increased levels of liability, even if offering something competitively priced and suitable. Second, it could reduce access to agent service and products for all but the most affluent clients who can afford fee-based help.

So why not just provide for disclosure? If a financial rep is not acting as a fiduciary, a simple disclosure and explanation could suffice.

A challenge to requiring a fiduciary standard is the public already sees many financial products like term life insurance as a commodity. This leads to “buyers” with zero interest in even talking to an adviser. These buyers want what they want, when they want it.

A fiduciary rule would mean forcing such buyers to divulge a level of personal details they may just want to skip. Yet this kind of info is what is needed if you expect any kind of real fiduciary standard to be applied. Is this what you really want?

The result could well be fewer people with access to affordable and wanted products and fewer people to serve them.

What amazes me is the number of people who don’t even give “fiduciary” level concern to their own affairs.

Dr. Hírek

I think this is so not only in India, the situation is similar elsewhere.

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