Pitching ‘Zero Commission’ catch line in the Marketing of Insurance

It is not clear how the IRDAI or the Insurers and the GI Council view the practice of insurers, and individual officers in these companies, in tempting insureds and the public with ‘zero commission’ offers. There are many issues in this. No insurance company publishes the rates they offer and hence it is impossible to find out whether the commission has been actually deducted from the premium. The public traditionally harbour a feeling that commissions in insurance are not a value adder, and the efforts of unscrupulous agents in mis-selling and force-selling or selling to get the highest commission possible are quite well known.

However, it is a well-recognised fact that insurance is a complex, hard to understand subject and even well organised companies need to be provided with information and advice when taking insurance and for servicing them. Another view is that almost no one buys insurance – it has to be sold to them. The Malhotra Committee was very clear that there is need for intermediaries in the market including Brokers, who were not till then allowed. After the IRDAI came into being, it is laudable that they have done very well in allowing many varieties of intermediaries and even appointed a Member (Intermediaries). So how are we to view the ‘0’ commission advertisements and selling?

It may be useful to examine the great value they offer to the public and to insurers.

? CUSTOMER

1. Despite felt need customers do not appear to enjoy buying insurance – consumer needs considerable motivational push to buy

2. Creating awareness of the products on offer and advising the methods to translate customer need into a best buy, lowers the search costs of the insured

3. Insurance products are written in a language that is difficult to understand, and the benefits offered are intangible. This need customer hand-holding to reduce the uncertainty costs of the insured

4. Intermediaries assist in crossing the many procedural hassles involved such as filling the proposal form, etc. and thus reduce the complexity costs involved.

5. There are needs for additional services such as endorsements to the policy, renewals, refunds etc. and this enhances the lifetime value of the coverage.

6. In the unfortunate event of a claim the insured needs even more handholding and liaising with the insurer to speed assessment and settlement.

7. They help to evaluate customer needs and help to ensure that the full line of insurance protection based as per life cycle and occupational needs is offered to the consumer for consideration.

8. They can make meaningful the security of the cover offered and the understandability of the products purchased. This enhances the feeling of security for the insured

9.The intermediary helps to shield customer against the actuarial mindset of the insurer who may see an insured as one of the thousands of policies they deal with daily.

10.They help the customer to evolve with the changes that is taking place in the marketplace with regard to better products and prices.

11.They thus give the necessary risk management, informational, relational and liaising services to the insured.

INSURER

1. Helps the insurer to attract good risks. There is always a knowledge asymmetry faced by the insurer with regard to an insured. Intermediaries can reduce these considerably.

2. Following on the above, the pricing of risks become far more accurate and helps to retain low risk customers and price rightly higher risk customers.

3. The services of the intermediary help everyone in the insurance market as otherwise the frictional costs that can arise out of asymmetric information can thrust a premium load on all policyholders, leading to less demand and credibility of the service offered.

4. The intermediary can bring to the table the behavioural aspects of the insured’s risk, which even a comprehensive risk survey cannot bring out.

5. Intermediaries can act as market makers, match buyer needs with insurer’s products and service capability, give feedback on customer demand and aspirations.

6. The intermediary carries to the market new products, and helps to gauge market reactions to new offerings offered by insurers.

7. Intermediaries provide detailed information to assist the insurer in ensuring that risks are properly underwritten and that claims are considered fairly and settled fast.

8. They can help to carry out research, test and develop new products, or new services.

9. They help insurer competitiveness by collection of risk specific or general information.

10. They assist in policy, renewal and claims documentation, and the lifelong retention of the customer through a double tier of relationships.

11. They can give feedback on the quality of service rendered by the insurer and the reputation of the insurer in the market and thus enhance insurer competitiveness.

It may be noted that there are many recognised types of insurance advice:

1. Non-advised sale = For pre-underwritten ready to sell simple products

2. Generic advice = Few coverages features to be advised on

3. Primary advice = Basic advice to be given

4. Focused advice = Specialised advice – depth of advice as needed

5. Full advice = Both width and depth of advice as required for complex products

However, Information & Promotion is needed for every kind of advice.

It is also to be noted that customers have important rights today such as:

Right to information & advice

Right to suitability of products

Right to fair terms

Right to fair treatment

Right to redressal of grievances

All these is important because insurance is clearly recognised as not a search good like a motor car, or an experience good like a good meal in a restaurant, but it is a credence product. Hence, good advice and providing information to generate credence in an intangible product is necessary and it is an unavoidable cost. So even when an insurer sells directly by whatever name it may be called, there is a cost to it. However, insurers have many more important duties than distribution and hence they usually specialise in other areas of the insurance value chain and leave providing information and advice to the public to an intermediary and pay a commission for the service. If they do this directly, a similar cost may be entailed. So, in the price of an insurance product, an inbuilt information and advice cost has to be factored in, which cannot be ignored or allowed to be hidden in these days of transparency and disclosures.

Hence the desirability of offering insurance products at ‘0’ commission may need an industry wise debate. There has been a persistent mindset against offering commission in non-life insurance. It is to the contrary in the Life Insurance sector. There is a feeling that in non-life many products are compulsory because of bank loans and even the law compels people to insure, such as seen in the case of motor third party insurance. Whenever the issue of paying commission comes up, all insurers appear unanimous to state that it is compulsory in law and the police force has to enforce this.

However, insurers refuse to read into the hundreds of court judgements from the highest level down, that compulsory third party insurance is a beneficial law solely in favour of the victim of of a motor accident and that courts will go to any length to ensure that insurers are made to pay for the award. Courts have held that it is not their duty to make business or profit for the insurer, but to protect the innocent victim of a motor accident. It is also seen that even the most mild and careful driver also may meet with unfortunate accidents. Yet many do not insure. Headlines like around 57% of vehicles in India is uninsured are still seen. This % is not a small number. From the beginning the industry has been unwilling to pay commission for third party insurance. Now it is understood that a small % of commission is allowed. This may mean that even now third-party cover may not reach its intended 100%.

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