When the high-powered committee on financial reforms, chaired by Pension regulator Dhirendra Swarup made its recommendations public last week, one point that really caught the attention was, understandably, the drastic reduction of the commissions that are paid out of insurance premia to insurance agents.
If the committee’s wishes become rules, commissions from the premia that customers pay would gradually drop from the current 40 percent to zero by 2011.
It is admirable the recommendations make an unequivocal connection between commissions and mis-selling of insurance products. It is not as if insurance customers are paying a high cost for what is otherwise a good deal. Instead, high commission levels practically guarantee that customers will be sold products that are harmful to their financial health and will continue to deliver that harm over and above the initial financial damage of having a huge commission deducted from the premia. Mis-selling is not an incidental evil. It is built into the current business model of the insurance industry.
However, I'm keeping my fingers crossed on whether the recommendations will become law. The insurance industry wields tremendous influence in the corridors of power as well as in the media and you can expect all sorts of arguments being put forth against these recommendations.
There was this story, narrated with a straight face, on a business TV channel the other day which said that insurance reforms would lead to lower ULIP (unit-linked insurance plan) sales, which would lead to lower investments in the stock markets in turn affecting the country's infrastructure development. I guess the implication is that it is an act of patriotism to have 40 per cent of your premium payment handed over to your insurance agent! I'm now waiting for someone to discover how fixing this mis-selling could damage the Indian cricket team's performance and worsen global warming.
The comments on the negative impact of the diversity of regulators we have is also significant. People save and invest through banks, the post office, provident fund, stocks, mutual funds, insurance and now the New Pension System. The regulation of these entities is done by different bodies without any overarching principle. This creates a sort of a regulatory arbitrage which pushes savers towards making choices based on factors other than the inherent suitability of financial products.