• THE OUTSIDE VIEW
  • DECEMBER 14, 2018

Should Insurance Agents Be Allowed To Sell Mutual Funds?

Last week, the Financial Express dated December 5, 2018, reported that the Insurance Regulatory and Development Authority of India (IRDA) is considering on expanding the scope of Insurance Marketing Firms (IMFs).

The IRDA appointed panel recommended that IMFs be allowed to sell group insurance policies to Micro, Small, and Medium Enterprises (MSME). They should also be permitted to sell crop insurance to debt-free farmers.

The panel also proposed that individual insurance agents shall be allowed to become Insurance Service Providers, and that their ambit of product offerings be extended to non-insurance products, such as Mutual Funds and Fixed Deposits (FDs) among others, subject to the submission of licenses and authorisation from respective authorities such as Capital Market Regulator and RBI.

If IRDA accepts these recommendations, insurance agents will be able to offer a plethora of financial products.

Is it good news for investors?

Given the track record of insurance agents, it will be a worrying factor for investors, especially novice investors.

At a time when Capital Market Regulator is tightening the screws on mutual fund distributors, IRDA is thinking about relaxing regulations. This could give ISPs and IMFs an edge over mutual fund distributors.

After Capital Market Regulator banned upfront commissions, mutual fund houses did pay distributors for distributing their products. But a number of mutual fund distributors also changed their business model, and some are exiting business.

Will exiting mutual fund distributors become ISPs?

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Here's what can happen going forward...

IRDA is thinking about demanding an undertaking stating that IMFs won't use the telemarketing channel to generate leads for their insurance business. As a result, they will have to tap potential customers with mutual fund products.

Convincing new investors to invest in mutual funds isn't a tough job because awareness about mutual fund investing is already on the rise. Campaigns such as 'Mutual Fund Sahi Hai' and other investor education drives undertaken at various platforms will continue to attract more people towards mutual fund investing.

Once insurance agents/marketers build a relationship with a customer, they might start showing their true colours and try to upsell Unit Linked Insurance Plans (ULIPs) and traditional insurance plans to newly acquired customers.

[Read: Why Endowment Plans are Useless: A Case Study]

Disparity in the commission structure on mutual fund products and the insurance products will always deter insurance agents, by whatever name called, to distribute mutual fund products.

Naturally, if the focus isn't on mutual funds, the quality of their recommendations would be substandard.

Do you know why penetration of insurance products continues to remain low in India?

The primary reason is insurance agents, as well as insurance companies, were never serious about promoting term plans until recently. Traditional investment-cum-insurance policies were their favourite products. It's only recently, after online insurance policies proliferated, that mutual fund agents have started talking about pure term plans.

An industry with such a history won't change its heart overnight after being allowed to sell other financial products. Neither will their business models change.

Will IRDA become as strict with insurance agents as Capital Market Regulator is with mutual fund distributors? Looks unlikely since state-run insurance companies still hold the highest market share of India's present insurance market.

Until this happens, insurance will remain a mis-seller's haven.

Some suggestions for investors:

  • Keep insurance agents at an arm's length even if they approach you with mutual fund offerings assuming IRDA will eventually allow them to do so.
  • Opt for pure risk insurance (term insurance) plans to take care of your dependents in your absence.
  • Always keep your insurance and investment needs separate. Don't buy an insurance product that also offers you an investment opportunity and vice versa.
  • Before you invest in a mutual fund scheme, always ensure that it's as per your personalised asset allocation that considers your financial goals and risk appetite.
  • Analyse mutual fund schemes on various quantitative and qualitative parameters.
  • While investing in a mutual fund scheme, opt for direct plans and invest through a Systematic Investment Plan (SIP).

Changing names and expanding product offerings won't change the character and the history of a person offering them. Insurance agents will always be insurance agents.

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Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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