PIA FORUM with DOREEN KAMBANGANJI
This week, Collins Chibwe highlights some of the serious consequences that mis-selling could have on the insurance companies and policyholders when transacting in various insurance products.
BY DEFINITION, mis-selling entails selling a product by giving a wrong picture of a product. It may include giving wrong information, giving unrealistic information or not giving full information about the product.
Insurance is a business of selling commitments and the value of insurance manifests when a financial promise is fulfilled by the insurer. Unfortunately, in some cases, commitments are broken because products are mis-sold.
Mis-selling is not unique to insurance and happens in various lines of businesses (loans, investment products, pharmacy, hospitality etc.), but insurance being an intangible service – the principle of caveat emptor (let the buyer beware) must prevail in insurance.
Often, the intermediary does not fully explain the policy details to the customer. Or the buyer (insured) is in a hurry and doesnâ€™t care to check the fine print. There have been cases reported where the agent deliberately misguides the buyer. A common example in life assurance is where an insurance agent sales a policy with a term of 10 years but, tells the policyholder that the same sum assured can be redeemed after two or three years as an option. From the insurerâ€™s perspective, the two or three years in the policy may refer to a clause on surrender value yet the unsuspecting policyholder may not be aware. For the insurance agent, normally this is not a problem, as they will have earned their commission, but at the expense of cheating or misinforming the unsuspecting policyholder.
Generally, insurance companies are most affected by â€œmis-sellingâ€ due to premeditated fraudulent misrepresentation of material facts. Insurance continues to be missold with senior citizens being the softest targets as they do not understand new products.
CONSEQUENCES OF MIS-SELLING: LAPSATION
Normally, a policy is said to lapse if it does not receive premiums at the expiry of the grace period. In most insurance contracts, the grace period runs for a period of 30 days, after which the insurer is at liberty to lapse the policy.
Lapsing policies has serious implications for both the insurance company and the policyholder. For the policyholder, a lapsed policy means benefits which were payable under the insurance contract will no longer be payable. Furthermore, any premiums paid on the policy prior to policy lapsation will be forfeited to the insurer.
For insurance companies particularly life companies, once a policy is accepted, the insurer undergoes costs for administrative processes, agentâ€™s commission and medical charges, which many times eat up almost all the first yearâ€™s premium collected as well as the major part of second year premium. After incurring these expenses, if there is an early lapse in the policy, then it poses a major financial threat to the insurer. Usually, a major reason for lapsed policies is the lack of communication between the insured and insurer after the sale of policy, leading to strained relationships.
Often the driving factor for mis-selling by insurance agents is to earn higher commissions and reach sales targets faster. However, this way of doing things eventually leads to mistrust between the insurance company/agent and the insuring public. A customer who has been cheated before is unlikely to trust an insurance agent again, however good the policy may be.
BAD WORD OF MOUTH
Some insurance policies, particularly life policies are usually sold on the basis of good reputation or experience resulting from using the product. A poorly sold or mis-sold policy, therefore, means that insurance companies can have challenges in selling policies to prospective customers. Often, these instances lead to a decline in insurance policies sold just because of bad publicity by friends, relatives etc as prospective customers are made to lose faith.
Therefore, our word of caution to would-be policyholders is that it is important to fully understand the agreement and making clarifications when in doubt to avoid unnecessary inconveniences.
Look out for Part II next week, where we will further elaborate on the possible causes of mis-selling.
The author is an Analyst- Insurance Supervision Department
For more information surrounding issues of insurance and pensions kindly visit the Pensions & Insurance Authorityâ€™s website at www.pia.org.zm
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PIA FORUM with DOREEN KAMBANGANJI