Life Insurance: Channel Development Associates May Face Headwinds

The recent IRDAI order doesn't augur well for 'Channel Development' or equivalent distribution models for Life Insurers in India. A leading private Life Insurer was recently fined Rs. 15 Lacs after the regulator decided that several activities related to their 'Channel Development Associates' were questionable in nature, and in direct violation of the Insurance Act (1938) or its associated guidelines.

Although the meagre penalty is tantamount to nothing more than a rap on the knuckles for the violating firm, it does send out a strong message urging other Life Insurers to clean up their acts when it comes to managing their channel development activities properly.

Off late, there has been a concerted push to clean up mis-selling across the board of financial products. From 'transparency crusader' U.K Sinha's efforts to implement RIA and reduce Mutual Fund expense ratios to IRDAI's recent efforts to curb Life Insurance mis-selling within banks, it would appear that consumer interest is, at long last, rightfully taking the centre stage within the financial services distribution ecosystem in India.

As per current rules and guidelines, Channel Development Associates or 'CDA's (not the Life Insurer) are responsible and accountable for training and coaching the agents that they appoint. They are also required to have adequate office space and infrastructure, enabling them to carry out their duties effectively. If the Insurance company itself starts taking the initiative to train the agents appointed by CDA's, 'the objective of appointing them is questionable', notes the IRDAI order. The message is simple: If the Life Insurance company is doing the CDA's job, why incur the extra cost by paying CDA's? In the end - all costs get passed on to the customer.

The order goes on to state that it is the Life Insurer's duty to exercise proper control on the activities of CDA. It cites a typical example of the CDA 'paying part premium on behalf of the customer' - such tactics are unquestionably aimed at enticing clients into purchasing policies for the wrong reasons, and almost invariably work to their detriment in the long run.

Each year, millions of hard earned investor wealth is lost because customers purchase products without a clear enough understanding of what they are getting into. Sky high surrender penalties and irrecoverable distribution expenses contribute to what essentially turns into a very bitter client experience.

The IRDAI order also re-emphasizes the intended role of CDA's - which, per the order, is to 'assist the Insurance company in recruitment of Advisors, training, on the job mentoring and monitoring of licensed advisors, and not solicitation of insurance business'. The regulator appears concerned that CDA's are acting as quasi-agents themselves; going out and sourcing business or getting their relatives and family members to do so on their behalf. Insurance companies that link pay-outs to the quantum of premiums sourced by agents appointed by CDA's could be exacerbating this issue. A failure to stick to protocol while empanelling new CDA's remains another area of concern - for instance; empanelling CDA's who are also permitted (as per their articles or partnership deeds) to sell insurance products themselves; a strict no-no.

A violation of the above described channel development structure can have dangerous repercussions, with blurring lines of accountability eventually going on to hurt the policy buyer. The IRDAI order makes it as clear as day that CDA's cannot sell policies; they are to act as enablers alone.

Now might be a good time for all Life Insurers who may be operating similar channels to look at their own structures with fresh eyes. As the legendary Jack Welch once famously advised: "Change before you have to".