How to protect customers from unethical insurance

Before you buy an insurance cover ensure that its what you need and not what the agent favours due to the high commission it attracts. Graphic/FILE  NATION MEDIA GROUP

By Isaiah Opiyo

In Summary

• It’s time the regulator makes the commissions earned uniform
• Over the years, commission-based system for agents has been cited as the main cause of unethical selling of products
• It is advisable to keep off from agents who don’t give you calculations; you could secure a cover beyond the sufficient amount which means a waste of premiums

A few years ago, a local insurer launched a life product targeted for the mass market with a Sh500 monthly premium.

The product was tailored for the informal sector and low income earners unable to afford insurance cover.

Whilst the mass market would easily afford the product, it did not appeal to the insurance agents as the commission offered was relatively insignificant. The insurer had offered a commission rate of 10 per cent on the premium paid per month.

This implied that for any sale of the product, the agent would earn Sh50 as commission which translates to Sh600 annually. To earn Sh6,000 at the end of the year, the agent had to sell the same cover to 10 customers.

This commission did not appeal to the agents as it could not even cover the expenses of meeting a potential customer.

After the launch, the product recorded low sales as the agents preferred to sell other products giving them lucrative commissions. Barely within a year, the product was faced out from the market.

This clearly illustrates how the commissions influence the choice of products that agents recommend for sale to potential consumers. Over the years, commission-based system for agents has been cited as the main cause of unethical selling of products.

Agents recommend particular products to earn higher commissions, rather than sell those suitable for the consumer.

Sometimes, the client may insist on the product to purchase and recommend a higher sum assured or size of insurance cover that would guarantee him higher commissions. It is important to note that the amount of sum assured has an influence on the amount of monthly premiums that is payable by a policyholder. A higher sum assured or amount of insurance cover would translate to a higher monthly premium payable by a policyholder.

A reader shared how he invited three agents from different insurers to determine the size of cover that is sufficient to meet his financial need. Surprisingly, he was shocked that each of the agents picked an arbitrary figure as a sufficient amount of cover without calculation. The variance on the amounts of insurance cover recommended by the agents was wide that he became confused on what to pick on.

The first agent recommended a sum assured of Sh10 million, the second, Sh25 million and the third, Sh35 million. Because of the confusion, he opted to consult a fee-based financial advisor who guided him through the calculation to determine the right amount of cover that could meet his needs. None of the sum assured suggested by the three agents was even closer to that given by the financial advisor.

It is advisable to keep off from agents who don’t give you calculations; you could secure a cover beyond the sufficient amount which means a waste of premiums.

If you buy a cover below the sufficient level, you could put yourself in a position where the compensation may not be sufficient to take you back to your original financial position.

This unethical practice by agents is not only unique to Kenya but in other countries such as Singapore amongst others. This unethical issue was one of the reasons that pushed Monetary Authority of Singapore (MAS) to launch a comprehensive review of the insurance industry last year.

The country plans to protect and benefit the consumer, raise the competence of financial advisory representatives, make financial advice a dedicated service and lower distribution costs. As part of the review, MAS proposed a switch from the commission-based system to a fee-based system as a way of paying agents. Once approved and ratified, the agents would be paid a fee for the advice they give, not on commissions. This fees will be borne by the consumers regardless of whether they purchase the products or not.