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Why Mis-selling is ruining industries

In Uncategorized on September 5, 2020 at 5:28 am
Misselling in health insurance and how to avoid being a victim - Turtlemint

Few days back, I have visited a public-sector and a private sector bank in Delhi. Surprisingly, when I get off my vehicle towards the bank, bank sales executives rushed towards me. Initially, I was too exhilarated with joy to observe executives’ excitement to serve the customer, but my happiness could not last long. They were not interested in offering any banking service to me. Instead, they found a new prey to sell insurance policies. Wittingly, they told me the new misleading rule of the bank that I can’t avail of any featured services of banks until I take an investment policy from them.

My initial conception was that bancassurance is a win-win situation for both banks and insurance companies as it is adding a revenue stream for banks in terms of incentives, while insurance companies has added a new channel of sales. My new experience was an eye-opener. I discussed it with few of my friends, they also faced the similar situation. I realized that it is the time when banks are going to book heavy losses. Whether realised or not, if banks will not focus on selling banking service to a customer and mis-sell insurance or investment products, they are doing some harm to themselves and doing permanent damage to the insurance industry. What motivated banks to pay more incentives to sell insurance policies than selling their own FDs and other services.

Another surprise to me is the institutionalization of bad practices. It is not the case of some banks, rather many others. Slowly and gradually, these malpractices become the norm of society, though unethical ones. I believe that the wrong incentivisation policy hurt the Indian banking industry. The driving force is the level of commission payments offered to sales staff for volume selling. The challenge lies in providing the right product in the right market. If I need COVID-19 policy, instead, I am being offered ULIP policies. Bank agents do not bother to explore customer needs. In addition, they force customers to buy something else, which is perhaps not needed. I am still intrigued to explore why mis-selling is not considered cheating/fraud when a customer is duped into gaining high incentives by an agent. Misrepresentation of facts is also common in mis-selling.

In laymen’s terms, mis-selling is generally observed when bank employees fail to act in the client’s best interest, provide inappropriate or wrong advice, fail to consider customer needs and circumstances to buy the policy, and mainly engage in low-risk profiling of customer. Selling of insurance policies should be ‘fair, clear, and non-misleading.’ In the financial industry, mis-selling has disastrous consequences. Every year, worldwide regulators fine numerous companies due to mis-selling. Some of the research found evidence that regulators’ fines and penalties make more damage (ten times) to the reputation of the company than actual financial loss.

Mis-selling is a result of the failure of risk governance at multiple levels. At the operational level, the sales executives have no concerns about the adverse implications of their actions on the company’s overall reputation, brand, and financial health. They think about their short-term incentives. In fact, in the current situation, following acceptable practices will lead to non-achievement of the sales target, resulting in job loss later for them.

Four years back, I had a brainstorming with the Chief Human Resource Officer (CHO) of the company about reasons for employee turnover. He told me that at that point, the company employed around 14000 employees, out of which 4000 are at the senior and middle level. The employee turnover per year for the rest 10,000 employees is 100%. That means that no employee is staying in the company for more than a year at the bottom of the pyramid. Think of what kind of value training will generate in this scenario.

At the strategic level, where is the oversight for these sales agreements? How is senior management ensuring that sales managers are taking care of due processes during sales? Where is the initiative to build customer trust? How executives follow ethical practices in marketing?

At the collective level, insurance companies and banks are considered to employ risk experts, underwriters, actuaries, and Chief Risk Officers. The adverse impact of bancassurance on banks and insurance companies was not evaluated yet despite expertise and capabilities.  

Cognition is essential to control mis-selling. Risk savvy workforce is needed to tackle the problem at the moment. Sales people should be given the opportunity to work for a shorter duration in risk management, claims management, and other departments on a rotation basis to understand different perspectives to sales. I have observed this trend in Germany. Agents should be taught the subject of mis-selling and relevant case studies to understand the long-term consequences of their actions.

Overall, the Insurance company’s sales policies need serious transformation at large.

The research argued that “the risk of mis-selling is particularly acute when the firm hires the same agents to both prospects for new customers and provide product advice.” The firms’ internal standards are in question for selling policies and advising customers. If steeper incentives are offered for sales representatives’ benefits, instead of customer benefits in the state of low regulatory fines, the mis-selling will persist longer.

Reference

Inderst, R., & Ottaviani, M. (2009). Misselling through agents. American Economic Review99(3), 883-908.

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