What Are the Problems in Life Insurance?
If you are working in a life insurance company, you must be aware of the major issues facing the industry. These include high upfront commissions, poor commercial outcomes, dealing with clients who have mental health issues, and low interest rates. Listed below are some of these issues and how you can deal with them. Read on to know more about the most common problems facing the industry. Listed below are some of the best practices for insurance agents.
High upfront commissions
Many of the top life insurance companies in India continue to use a traditional agency network. The largest life insurer in India depends heavily on a network of corporate agents, each of whom earns a commission from the insurance company. The amount of the commission varies depending on the type of policy sold, but some agents purposely mis-sell policies to earn high commissions. For this reason, it is important to read the fine print when deciding which insurer or agent to choose.
The Insurance Regulatory and Development Authority of India (IRDA) has taken up the issue of high upfront commissions in life insurance policies. The regulatory body is working towards replacing high upfront commissions with level commissions to combat mis-selling. Its GM, Actuarial, SP Chakraborty, has urged the industry to follow suit. But some life insurance firms have yet to follow its lead. For now, high upfront commissions in life insurance are the norm.
While some insurers provide a hefty upfront commission for selling new policies, others do not. Many agents earn around 40% of the first year’s premium. The commission for renewals is usually much lower. Health insurance producers also follow a similar structure, but they take home more money early. However, these commissions typically expire after three years and are focused on finding new business. Despite these high upfront commissions in life insurance, there are still many disadvantages to this compensation scheme.
In 2016, the Murray Financial System Inquiry recommended that upfront commissions should be capped at 70%. The ASIC report found a significant correlation between high upfront commissions and poor consumer outcomes. As a result, the life insurance industry agreed to change its compensation structure. In addition to the new upfront commission cap, the industry agreed to continue reporting policy replacement data to the regulator starting in July 2016. In the meantime, the government also agreed to review the incentive structure.
Dealing with customers with mental health issues
The insurance industry can help by providing guidance on the application process. Some 56% of respondents said they would like insurers to be clear about the mental health of an applicant. They said that negative experiences of applying for a policy deterred them from applying again. Therefore, potential applicants want reassurance and positive messages from insurers when applying for life cover. The report makes eight recommendations. The insurers should review their application processes, increase transparency, and increase staff training. It also recommends that government takes affirmative action by ensuring that they comply with the Equality Act and monitoring the application process.
Insurers would also save money by providing benefits to customers with mental health issues that require medical treatment. Often, they do not differentiate between mild and severe mental illnesses, so it’s important to be completely honest. Not sharing all medical information can delay the approval process. Insurance providers may also deny claims made by beneficiaries if they find out later. If you don’t share all relevant information, you risk losing your life insurance policy.
Low interest rates
The recent decline in interest rates has affected life insurance in many ways. The spread between interest credited to policyholders and interest earned is compressed, which decreases the insurers’ net income and may put them at risk of not meeting contractual obligations. During this time, life insurers are adjusting their policies to reduce the spread between credited and earned interest. Insurers are trying to make up for this shortfall by reducing the terms of new policies and lowering guaranteed rates.
While low interest rates have impacted the profitability of life insurers, they are not the cause. They are a symptom of a more persistent, long-term trend in the life insurance market. The low interest rates that accompanied the global financial crisis have also affected life insurers’ product earnings. Since the life insurance sector focuses on saving and long-term investments, sustained low interest rates are bad for all insurers.
The low interest rates in life insurance have also changed product design in many countries. In Japan, life insurance product design shifted from savings to protection. Before the 1990s, the endowment and whole life market was large. However, a decline in interest rates resulted in the popularity of term products with riders and variable annuities. Afterward, foreign currency denominated annuities became popular. As a result, a significant number of insurance companies redesigned their products to meet the changing needs of consumers.
The fall in interest rates has also impacted the value of existing assets. While the market value of existing bonds increases, the life insurance companies did not see a significant increase in their statutory capital position. Furthermore, under the statutory valuation law, insurance companies must conduct a cash flow testing exercise every year. To do so, they must build and run a financial model of in-force assets and liabilities. In most cases, companies run the financial model over a sufficient number of years. To make sure that their financial model accurately reflects the in-force assets and liabilities, they run stochastically generated interest rate scenarios for 1,000 years. They also run seven deterministic interest rate scenarios.
The most common ways of avoiding unscrupulous agents in life insurance are to shop around and do your research. Many agents are paid a commission by the insurers for generating new business. But unethical agents may pad policies by adding unnecessary coverages or charges to them. Whether your agent is legitimate is another matter entirely, but you should be wary of any insurance company that demands extra premiums without supplying you with the appropriate documentation.
Another common way that unscrupulous agents take your money is by using false documents to trick you into paying for insurance that you don’t actually need. Agents can even steal your premium payments by issuing phony documents to customers, making it appear that you’ve bought a policy. These agents often accept premium payments for bogus policies by depositing them into their own bank account instead of the insurance company’s. They may even have a bank account that isn’t connected to the insurance company. As a result, you’ll write checks to the agent instead of the insurer, and the insurer never sees the money.
Unscrupulous agents in life insurance may also be fake or unlicensed. These agents may present false documents and billboards in order to persuade you to purchase a policy. They might even claim to represent a major life insurance company and ask you to pay for premiums in advance. Always work with a licensed agent. Check their license number on the state’s licensing website before dealing with them.
Lastly, a lack of complete disclosure about a policyowner’s rights and benefits is unethical. An insurance agent who fails to provide the ” Look” provision for policyholders is unethical. Even if he is licensed, he still has an incentive to make money through the sale of a policy. This is illegal and will lead to criminal charges. And as you can see, these practices are not limited to life insurance.