Last Month, insurance regulator IRDA came out with a draft 'Prospect Product Matrix'. This is a set of processes that will document the inputs and the reasoning on the basis of which an insurance broker has recommended a particular product to a customer.
As the draft stands, the core of this matrix consists of three steps. One, a set of almost 100 questions that the broker must ask a prospect. Two, the needs of the prospect, as identified by the broker. And three, a set of recommendations based on those needs.
In principle, this is a great move. Selling unsuitable policies lies at the root of the disastrous slowdown that insurers face today. If they hadn't indulged in the Great ULIP Rip-off of 2004-2010, then there wouldn't be any need for such measures today. However, as things stand, IRDA's proposed 'Prospect Product Matrix' probably doesn't go far enough in setting up the actual decision-making framework that will dictate what kind of inputs should result in the recommendation of which products. It does give some illustrative examples on this, but these don't amount to real guidelines.
When one looks at the actual nature of the mis-selling that has plagued India's insurance sector, one fact stands out-the paucity of actual insurance, (that is, insurance cover), in the products that are being sold. There is a hierarchy of needs in insurance products. At the base, lies term insurance, which is the product that insurance sellers are most hostile to.
IRDA should consider putting in place a hard, precisely quantified rule to solve this problem. It could, for example, mandate that it is forbidden to sell any other insurance product unless the customer has term cover at least equal to the last five years' income. Given the experience of the decade gone by, IRDA would do a great service to insurance customers by doing something like this.