Mis-selling, a nightmare for the insurance industry- Part II

PIA FORUM with COLLINS CHIBWE Analyst – Insurance Supervision Department
Last week, we highlighted some of the serious consequences that mis-selling could have on the insurance companies and policyholders when transacting in various insurance products. In today’s column, we continue to focus on the subject to bring out the possible causes of mis-selling, which entails selling a product by giving a wrong picture of a product.
AS EARLIER explained in the previous column, like in other businesses, mis-selling can happen and the insurance sector is not exceptional.
However, it is critical to explain to would-be policyholders before signing up an agreement to prevent this happening.
Nature of insurance products
By their very nature, insurance products are complex for average consumers. Equally, asymmetry of information between the insured and insurer or his agent leads to a wave of mis-selling. Also, most policy documents are full of jargon and fine prints which make it beyond the comprehensive ability of the insured to interpret their real meaning. This leads to controversies between the policyholder and the insurer.
Aggressive marketing
Insurance is a reluctant product, meaning most consumers simply buy insurance to escape the undesirable consequences of being uninsured. The nature of the insurance market, therefore, encourages sales agents and other distribution channels to sell products by ‘hook or crook’.
Financial literacy
In a situation where the prospect is not “financially literate”, there is a greater probability that the sale would not be need-based. In most cases, people do not assess their financial needs before buying products. Ordinarily, products may be bought simply because a colleague of theirs has bought one without necessarily assessing whether the product is in tune with their financial objectives. As a result, people end up helping an insurance agent achieve his goals rather than theirs.
Reward system of insurance agents
Insurance agents are usually remunerated on commission basis. This means that if an agent is unable to sale sufficient policies, they may not receive any commission. This is usually the case with most new insurance agents. To mitigate this, some insurance companies opt to give new insurance agents advance commission. However, pressure to build an account faster and hence earn more commission tempts most insurance agents to engage in mis-selling.
Lack of post-sale checks
Normally, most policyholders rarely take time to read policy documents or follow up with insurance companies on any areas of the policy where they may need clarification. The only time the policyholders would take keen interest in their policies is when a claim has arisen.
While the duty of disclosure in insurance requires that both the insured and the insurer or their agent disclose anything material to the contract, in a case of this nature, there is no doubt that the insured is also liable to check what he has purchased. Prompt inspection can help the insured validate the claims made by a sales agent at sales stage and where these are found to be false; the insured can cancel the policy.
Shortage of qualified agents
Some insurance agents do not take the profession seriously because of ulterior motives when joining the industry. Some insurance agents enter the insurance industry merely to raise money for college. Others may simply become sales agents because they are not good enough to get a job elsewhere. It is usually this class of agents which often engages in mis-selling, as they know they have no long-term intentions of being in the industry. To address this problem, the Pensions and Insurance Authority requires that all licensed insurance agents should have served in the industry for at least five years. The authority also requires that agents are “fit and proper” and pass a number of other regulatory tests.
Preventing mis-selling: Insurer perspective
Persistent ratio
Insurers will have to strengthen the use of the persistent ratio as a performance measure for insurance agents. A ratio above a certain threshold can be rewarded to encourage good performance. Obviously, a higher persistent ratio can mean policies are being sold on proper advice.
The future of the insurance industry lies in effectively training agents as they create the first contact between the insurance company and prospective policyholders. Insurers must, therefore, invest in training programmes to develop insurance agents and motivate them enough to grow into CEOs of tomorrow.
Product literature
Insurers must also design product literature and promotional materials to reflect the characteristics of the target market, be it income status, education or other demographic strata. For example, it would be logical for an insurer serving a rural segment of the market to design marketing materials and other policy documents in vernacular, making it easier for a layman to understand and hence widen its reach. The terms and conditions, benefits, charges, lock in period etc should be specified in bold and simple language.
Simplified policy documents
Insurance companies should simplify their terms and conditions to remove any hidden meanings or terms. They should take this as part of their corporate governance to financially educate the insured.
Distributor reward system
The interest of the distributor and the customer needs to be aligned by remunerating him throughout the term of the policy rather than heavily paying front-loaded commissions. This will force the agents to sell products with a long-term perspective and ensure proper policy servicing.
Underwriting checks
At underwriting stage, sometimes an underwriter can suspect and detect mis-selling. For example, how else do you explain the fact that the same client has bought two whole life policies with the same sum assured and same beneficiary? This is a clear case of mis-selling. Prudent underwriters will have to verify such policies by simply contacting the customer and elicit a response from him regarding the product which has been sold to him. He should also ensure that the customer has bought the intended product.
For more information surrounding issues of insurance and pensions, kindly visit the Pensions & Insurance Authority’s website at
You can also contact us on 221 251401-5

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