Orphaned life insurance policies

by | May 30, 2019 | Learning Module 1, Topic 4: Life Insurance -Term life | 0 comments

The video and deep dives on life insurance talk about the aggressive manner in which life insurance policies are marketed. Typically, over 50% of all life insurance policies are sold by about 2 million agents, with the rest directly sold by the banks. There are over 2 million insurance agents in India according to the Insurance Regulatory and Development Authority (IRDA). Attrition rates in this industry are about 3% according to a recent KPMG report. (This is actually quite low, compared to retail and IT where the attrition rate is 25-30%!) Still, about 60,000 agents leave their insurance jobs on average each year.  These agents are paid largely out of the commissions they generate at the time the policy is sold and IRDA is trying to restructure the compensation for these agents. Besides, the opportunities for advancing their careers are limited.

So why am I talking about this. Suppose you purchased a life insurance policy from a “friendly” agent. Once the policy is sold, that agent is supposed to assist you throughout its life, ensure your address, bank and KYC documents are in order so that payments and bonuses are credited to you, assist you with switching investment schemes over the policy’s life should you so desire. These activities are collectively known as servicing the insurance policy. So, what happens if your agent is among the 60,000 who have quit the insurance business altogether? The policy is “orphaned.”  Ideally, the policy is to be allocated to another agent for servicing, but that very often does not happen for months on end. When new business is where the money is, what is an agent’s incentive to continue servicing an older policy?