Inside insurance policies

When you intend to buy a financial product, it’s necessary for you do your homework
Inside insurance policies
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The banking set-up has radically changed and is still undergoing transformation. This transformation has brought more and more financial services under the ambit of banks through third party product mode. The main aim has been to convert bank branches as super financial markets where a customer of any nature gets all services under one roof. In third party product segment, it's the insurance sector which has got a fillip in terms of creating awareness and increasing penetration into unreached areas.

There's no denying the fact that banking network has been given a boost to the insurance sector after the industry was privatized 16 years ago. The objective of privatization was to create awareness and increase insurance penetration in the country. As revealed in several studies, the number of insurers has grown manifold with penetration for life insurance increasing from 1.5 percent in financial year (FY) 2000 to almost 3 percent in FY 2016. It was reported as high as 4.5 percent in FY 2010, while in non-life insurance it increased from 0.5 percent to 0.7 percent.

However, the main thing which happened in the industry has been significant changes in the product portfolio as well as the channel mix. It was during this period we among other things witnessed emergence of bancassurance, de-tariffing, regulatory activism, explosion of health insurance as well as the emergence of large government insurance schemes.

However, difficult economic situation in the past few years changed customer behavior. Even multiple regulatory changes on products and other operational matters added to the woes of the sector. The result has been that the profitability of insurance providers has been really hurting. So the situation has thrown a key challenge for the insurance industry to have a sustainable growth and also be constantly profitable.

As the above given situation has triggered competitive business environment, sale and purchase of insurance products has become a daunting task, both for the financial institutions and the customers. Insurance companies are grossly engaged in tailoring financial products to lure customers through 'concessions and special offers', which most of the time are hard to understand. 

In a bid to woo more and more customers, unfair business practices have become order of the day at the insurance counters run within the bank branches.  As far as our state is concerned, we have lot of stories dating back to 2007 of mis-selling of insurance policies to the gullible customers. That was a time when investment in banks' fixed deposit schemes would double in over 7 years' time and market linked insurance policies were sold on the pretext of doubling the investment in three years' time.

A lot was debated on this kind of mis-selling. But hardly a word was uttered about the bad decision of the customers and the investors, as most of the times they exhibited herd mentality. We have been targeting financial intermediaries for making money through mis-selling causing huge financial loss to the gullible investors. I am not saying, the targeting was wrong, but hardly I found anyone catching hold of investors for mis-buying.

You will usually find that savers make dozens of mistakes while investing in a financial scheme – partly because they are careless and partly because we humans find it hard to deal rationally with money. Commonly, they buy a scheme without understanding its features, or risks associated with the investment. An element of greed or too trusting nature also results in mis-buying of a product. Unfortunately, mis-buying is not accepted by an investor and very easily tends to pass the buck on to financial intermediaries who sell financial schemes. 

Actually, nobody expects bad things to happen. But in financial matters, this optimism is counterproductive. Investors buy on the expectation of better returns, but without taking into consideration the negatives. People find it useful by moving in herds for survival, but this herd mentality has disastrous consequences in financial matters.

The basic prescription to prevent mis-buying is literacy. So when you intend to buy a financial product, it's necessary for you do your homework before buying the product. If you are not able to understand the features of the product, don't hesitate to seek consult a financial expert to understand the product. At the same time, the financial institutions who sell these products are under obligation to spend some time on educating the customers. They should not feel shy to disclose probable negatives of these insurance schemes.

(The views are of the author & not that of the institution he works for)

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