Ever regretted buying an insurance policy? Yeah? Me too! It happens to many of us and for various reasons. One of them is mis-selling.

This column often advises readers to do homework before committing money to an insurance policy, warning them against ‘mis-buying’. But what is mis-selling?

If you have bought an insurance policy relying on advice and discover later that you have to pay annual premiums on what was sold to you as a single premium policy, if you realise there is a lock-in period for exiting the policy that you did not know about, if you find that the ‘mandatory’ policy you were pressured into taking was optional…. chances are you are a victim of mis-selling.

Union Finance Minister, Nirmala Sitharaman, recently warned banks quite sternly against mis-selling insurance and advised them to focus on their core business of lending.

But once upon a time bank margins were so squeezed that the opportunity to cross-sell insurance to earn fee-based income was a blessing.

It suited a rapidly expanding insurance industry which needed a wide and deep financial services network. So was born bancassurance andit has contributed significantly to insurance sales over the decades.

Pressure selling

Insurance, it is said, is always sold and never bought. The reluctant and ignorant prospect has to be convinced. Badgering, scare tactics and the lure of saving tax helps the process.

Almost all intermediaries hard-sell insurance, but some add false promises, partial information and even outright misinformation. It could be about the nature of the policy, suitability, pricing, what you are entitled to from the policy or what you are obligated to do to maintain it.

Some deception is ‘expected’ in marketing and selling, after all that’s why it is said, “let the buyer beware”. But when you read about an 80-year old who was sold a 100-year term policy, words fail you.

Insurance is an intangible product, complex and trust-based. Add to this customer reluctance, low financial literacy and even some active revulsion about the product. This is the opportunity for mis-selling.

However, aggressive selling is not necessarily mis-selling. The former is persistent and high-pitched. When it involves false promises or strategic silence on some policy features, it becomes mis-selling.

Mis-selling is not outright fraud either. It exists in a grey zone where the disclaimers and documents say one thing with the signatures prove it. But the implied benefits and understanding of the policy are different.

Like a long-term insurance policy sold as “just like a fixed deposit, but even better” to someone investing retirement savings. Like a hospitalisation policy that is projected as a complete or unlimited cover. Like a ‘compulsory’ home fire policy to go with a home loan.

When reality clashes with expectations, trust is lost. On the policy, the seller, the insurance company and industry. Maybe even on insurance itself. What is devastating is that it happens at the moment of the paying customer’s deepest need.

We will see the hows and whys of insurance mis-selling in the forthcoming instalments of CoverNote. And explore how you as a customer can safeguard yourself against it, or seek remedies when needed.

(The writer is a business journalist specialising in insurance & corporate history)