Combatting Insurance Mis-selling: Insights and Solutions

Insurance Mis-selling has become prevalent due to insufficient customer awareness. People often remain unaware of their mistakes until they need to file a claim. A recent letter from the Department of Financial Services (DFS) to heads of public sector banks said that it had received complaints that fraudulent and unethical practices are adopted by banks and life insurance companies to sell policies to bank customers.  

In the near future, the Insurance Regulatory and Development Authority of India (IRDAI) is expected to instruct insurance agents to maintain audio-visual records of their sales presentations, wherein they must articulate a summary of the policy features to potential buyers. The government has also sought suggestions from lenders on steps to curb mis-selling through banking channels as part of efforts to strengthen regulatory oversight of the bancassurance model.  

Explore how VISoF, Binary Semantics’ InsureTech platform, can collaborate and solve the issue of insurance mis-selling. Delve into the underlying reasons and discover the effective strategies to combat mis-selling in the insurance industry. 

Decoding Mis-Selling: A Closer Look at IRDAI’s Definition 

According to IRDAI’s Consumer Affairs Booklet, Mis-selling refers to “unfair or fraudulent practices adopted at the time of soliciting and selling insurance and generally includes selling policies which have not been sought by the customer or which are different from what the customer wanted or was promised or where the product offered for sale is not suitable to the needs of the customer”. 

Therefore, mis-selling in insurance could be described as selling a product/service to a customer in a manner which is detrimental to his/her interest. 

Mis-Selling Trends: IRDAI’s Battle Against Insurance Mis-Selling 

Mis-selling falls under the Unfair Business Practices (UFBP) of the IRDAI. IRDAI has received 23,110 complaints about mis-selling in insurance in 2021-22. In 2020-21, the complaints of mis-selling stood at 25,482.  

The latest data from IRDAI indicates a decline in the incidence of mis-selling complaints per 10,000 policies sold over the years. However, there has been an increase in the percentage of mis-selling complaints being resolved in favor of the complainant, rising from 24% in 2020-21 to 27% in 2021-22.  

The fact that nearly one-fourth of the complaints are ruled in favor of the complainant underscores IRDAI’s commitment to addressing and discouraging mis-selling practices. 

Read More: Customer Intelligence for Insurance: Harnessing Strategic Insights 

Unraveling the Challenges of Insurance Mis-selling and Communication Gaps 

The origin of the dispute often lies in a lack of proper communication. During the sale of insurance, policyholders are typically only informed about the positive aspects of the policy. It’s only when policyholders file claims that the insurance company representatives disclose the exclusions. 

Typically, insurance companies maintain engagement with customers until the conclusion of the free look period. However, they often become less involved afterwards, as claims of mis-selling are not viable beyond that point.  

The reasons for mis-selling in insurance are,

1. Salespersons involved in sourcing the business may provide inaccurate explanations of product features and benefits.  
2. Insurance policies often feature terms and conditions written in “ambiguous language,” posing challenges for consumer comprehension. 
3. Employees may resort to mis-selling to meet their targets. 
4. Most instances of insurance mis-selling by banks occur through bancassurance. Previously, banks were only permitted to sell-single life and non-life insurance products. However, with new RBI guidelines, banks now function as insurance brokers, offering multiple insurance products tailored to customers’ unique requirements. 
5. Policy is sold to prospects assuring of loans, bonuses, medical benefits, gold coins, mobile towers, or other perks upon purchasing an insurance policy. 
6. Freelook cancellation requests are rejected by Sales personnel who are not authorized to make such decisions. 
7. There are instances of tampering and forgery of proposals and other related documents in the sales process. 

Read More: Insurance Transformation with VISoF Integration APIs 

Unravelling the Domino Effect: The Wide-Ranging Impacts of Insurance Mis-Selling 

It is often thought that it’s the customers that end up with the wrong end of the stick while mis-selling any insurance product. But it is not the reality. When insurance mis-selling happens, it affects the entire gamut of the insurance industry.  

Hamper Insurance Landscape and Market Confidence 

A rise in mis-selling occurrences has the potential to negatively affect the expansion of the insurance sector, subsequently influencing the accessibility of long-term funds for economic development. 

Affects Customer Satisfaction  

Clients who believe they have been misled by insurance policies tend to voice their dissatisfaction by filing complaints. The mis-sold insurance product-related complaints can directly fall under the grievances per 10000 policy issued criteria of IRDAI. This will increase customer discontent and lead to a fall in customer retention. 

Impact on Employee Morale 

Employees working for insurers involved in mis-selling incidents may experience decreased morale due to the negative environment and potential job insecurities.  

Brand Integrity at stake 

As the customer is the lifeline of insurance firms, in the long run, they will hamper the business and it is not an easy task to regain customer confidence, especially in a highly competitive Indian insurance sector. Further, insurance sector-related awareness will increase customer knowledge and damage the brand image of the insurance company. 

Regulatory Scrutiny and Legal Consequences 

IRDAI has the authority to probe instances of insurance misselling, which can bring legal repercussions for insurers. Consequences may include fines, penalties, and heightened regulatory scrutiny. Legal actions and lawsuits by affected customers can ensue, creating costly and time-consuming legal battles for insurers. 

Shaping a Transparent Future in Insurance Practices 

IRDAI’s Proactive Measures 

• IRDAI’s Integrated Grievance Management System (IGMS) records complaints from customers against all insurance providers nationwide. In IGMS, the complaints relating to misselling are included under the broad category of “Unfair Business Practices”. 
• IRDAI (Protection of Policyholders’ Interests) Regulations, 2017 necessitate insurers to establish a board-approved policy outlining specific measures to prevent mis-selling and unfair business practices during sales and service interactions. Moreover, Regulation 6 delineates the criteria that insurers, agents, and intermediaries must meet at the point of sale. The IRDAI retains the authority to pursue legal action against any party found to be in breach of these stipulations. 
• IRDA (Advertisement and Disclosure) Regulations, 2000, along with other advertising regulations, aim to prevent the dissemination of deceptive or misleading statements in any medium, including online platforms, during the promotion, sale, or solicitation of insurance. 
• In order to enhance transparency and reduce instances of mis-selling, IRDAI has mandated insurers to provide explicit policy-related communication to potential customers. For example, IRDAI has directed insurers to provide benefit illustrations using two distinct assumed rates of return in a specified format. 

The IRDAI asked all the life insurers to draw out a company-specific policy on handling mis-selling complaints and spurious calls. Similarly, the Consumer Affairs department has urged the Finance Ministry to modify regulations, advocating for clear explanations of policy terms and conditions, or at least a summary, to mitigate mis-selling in insurance. Additionally, they proposed that policies should distinctly outline inclusions and exclusions. 

Read more: From Slow Claims to Instant Payouts: How AI is Changing Insurance 

Beyond Compliance: Strategies to Ensure Ethical Practices in Insurance 

There is a necessity to assure the general public that the regulatory structure in the insurance business is sufficiently robust to safeguard the interests and address the grievances of policyholders. To achieve this, while adherence to IRDAI regulations is crucial, insurance companies can also explore various options to build consumer trust and bolster business credibility.   

Agile Policy Integration 

Apart from setting insurance sales targets, the companies have to keep track of their POSPs, MISPs, ISPs, SPs and DPs to know the person who mis-sold the insurance product. This will help to take the required actions towards him/her. Also, by following this approach, any insurance company or insurance intermediary can encourage staff professionalization and foster a culture free of such practices within the organization. For instance, the VISoF system’s System Log, User Audit Trail, multiple MIS Reports, can aid in that.  

Ensure Transparent Communication with Customers 

Consistent, transparent communication with customers is the key to overcome mis-selling. This builds trust and facilitates quick resolution of any mis-selling concerns raised on the customer portal within the free-look period and post-sale disputes. For instance, one can utilize VISoF modules and APIs to ensure that during purchases or cancellations.  

Use Technology to Document Chats 

While selling insurance, one can explore virtual agent chatbots to make the customer chats documented. Since chatbot conversations are pre-defined there is no scope for misinformation to the client. This will help prevent insurance mis-selling in two ways, one by providing only valid information to customers and two by documenting the customer conversation. To do that, one can utilize VISoF’s Secure Conversational AI feature to ensure secure conversation with the client while buying the insurance policy.  

Conclusion 

Insurance mis-selling demands urgent attention. Collaborate with Binary Semantics for other innovative solutions to enhance your business. This includes ensuring seamless and efficient tax reconciliation through our GST Billing Software, leveraging FleetRobo’s Fieldforce Tracking Solutions to efficiently manage field insurance agents, and conducting advanced AI-based Data Analytics using our sophisticated BI Solutions. 

Connect with Us for further information.