Imagine a scenario where you are buying a washing machine. While the salesperson extolls the benefits of different washing machines, what are the criteria based on which you, the end customer, will make your decision?

For most people, it is the machine’s load capacity and level of automation because these features have a direct bearing on their everyday wash experience. Other features are add-ons that one can optimise based on preference and budget. These two most important features are comparable across different brands of washing machines, making need assessment and product purchase decisions easy and intuitive for customers.

But why are we talking about washing machines in the context of life insurance disclosures? Because product feature comparability matters, more so in the context of complex financial products like endowment life insurance.

Life insurance seeks to protect the interests of dependents after the lifetime of the policyholder as opposed to most other forms of insurance that usually benefit the policyholder themselves. This creates unique barriers to take-up, and therefore, life insurance is often bundled with savings or investments to make them palatable to policyholders themselves and sold via agents to improve take-up.

However, life insurance product choice is a matter of good fit, and not all savings-cum-insurance products are universally suitable for all categories of customers.

The Insurance Regulatory and Development Authority of India (IRDAI) prescribes benefits illustrations that seek to provide customers with information on their life insurance products in a tabular format.

Info overload

While it is comprehensive, the densely packed information often fails to inform policyholders about the key features of the life insurance that they are signing up for. Imagine being given a user manual for different washing machines as a decision aid. It causes information overload, blurs focus from the most relevant specifications, and incapacitates customers from thinking through their own needs in the context of the product.

Expectedly, customers are pushed to rely on agents to advise and explain these product features to them.

It is in recognition of the constraints on the part of the average customer that IRDAI mandates a suitability assessment to be done by agents at the time of sale. While this mandate envisions a fiduciary role for agents, a Dvara Research analysis found wide variations in its implementation and gaps in its effectiveness. The commission differentials across different life insurance products skew the incentives for agents towards certain products, undermining efforts towards suitability assessment.

Agents armed with complex disclosures are free to highlight or underplay product features to their advantage. In fact, the term ‘surrender benefit’ itself could be misleading for most customers who do not immediately understand that this benefit, in fact, entails a penalty on premiums paid.

A Dvara Research field study found that customers of endowment products were often unaware of the penalty for premature exit, and surrender conditions were not discussed by their agents at the time of sale.

The new regulations notified by IRDAI have brought clarity and coherence to surrender terms and have also prescribed a comprehensive Customer Information Sheet (CIS). While this CIS is very much a step in the right direction, a post-sales CIS akin to such mandates in other financial products does not work equally well for life insurance.

This is because Key Facts Statements of loan products or CIS for health insurance assist customers in using their product well during the relatively shorter product term. However, endowment life insurance typically entails a one-time decision that the policyholder needs to stick with for a substantially long period without their having to necessarily use the policy. This inherent difference in life insurance versus other such products calls for different measures to ensure good customer outcomes.

Suitable choice

Customers of endowment-like insurance products, therefore, need to have all pertinent details at the time of policy purchase to make the most suitable choice. The six primary criteria of relevance are — death benefits to ensure coverage, survival benefits to ensure returns to savings, premiums to ensure payment capacity, premium payment term to determine compatibility, policy term to ensure duration of coverage and penalty rules to ascertain downside risk due to premature exit.

Other product features like loan options and riders are add-ons that can be detailed in any post-sale CIS but do not have the same bearing on product suitability for customers.

Therefore, to realise the true potential of disclosures in life insurance, it needs to act first as a decision-making tool and then as a post-sale documentary collateral.

This simplified six-point disclosure could be made mandatory in marketing materials, customised quotes given to customers and brochures issued by insurance companies. Think of the nutrition facts table mandated by FSSAI on all packaged food products.

In life insurance, this would provide customers with all the necessary information prior to product purchase, aid comparison across different products and help customers ask for and make suitable life insurance choices from among different categories of products. Further, given the conflicting incentives common to many agent-led models of distribution, such simplified disclosures can temper and moderate agent influence and act as a bulwark against mis-sale.

A well-designed disclosure incorporated at the right stage of product purchase can help build a two-way road towards suitable life insurance sales — one from the agent side and another from the customer side. This, in turn, would engender trust in formal life insurance, improve the level of customer knowledge and know-how over time, and assist in deepening and broadening the maturing insurance sector in India.

The writer is Senior Research Associate, Dvara Research

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