Life insurers or MLM cos?

A few serious allegations about a number of life insurance companies which many tend to believe to be true even without any spot probe, deserve immediate attention of the authorities concerned. This is primarily because the financial interests of hundreds of poor policyholders are involved here. Given the reactions of the insurance regulator to the allegations, there are some reasons to consider that scores of policyholders in outreach districts are now at risk of losing their hard-earned savings deposited as premiums with some third and fourth generation life insurance companies. The latter's style of operations can be likened, to a great extent, to fraudulent multi-level marketing (MLM) companies or 'chit firms'.

Quite a few little known life insurers, according to a recent media report, have closed down around 200 of their branches located in the outreach districts, mainly in rural areas. Allegations have it that the concerned life 'firms' had started winding up their branches in northern and south-western districts when maturity period of most number of life policies drew nearer. The number of their policyholders among whom the majority belong to the lower middleclass, are now at risk of losing the money they had deposited as premiums over the years. What would come as a surprise to many is that the Insurance Development and Regulatory Authority (IDRA) is not in the know of things; it is not even aware of the number of branches the insurance companies have across the country. The insurers reportedly do not need to take permission from the IDRA to open or shut their branches. But the IDRA says it has received allegations about closure of around 200 branches by the life insurance 'firms'.

The IDRA, as the media report said, is concerned that the insurers in question might continue to show the management spending of the closed branches in their balance sheets to hoodwink it (IDRA). But it is not clear how the regulator would save hundreds of hapless policyholders from losing their hard-earned money given as policy premiums. It is now almost certain that the country's insurance industry is not in a good shape. Even the policymakers who have granted permission to open insurance companies, though quite frustratingly in many cases, because of political considerations, are unlikely to contest this unpalatable truth.

The insurance industry is an important segment of the country's financial sector. But it is unfortunately suffering now from a dangerous ailment -- overcapacity. The existence of insurers more than the economy can afford or absorb, has given rise to unhealthy competition, unethical practices and fraudulence in both wings of the industry -- general and life. A good number of new entrants are now allegedly devouring their paid-up capital, basically to meet management expenses. Even the payment of salaries to officials and employees is not regular in many such companies.

It will be foolhardy to overlook the importance of insurance industry in the economy. The industry is basically designed to protect both businesses and general people to overcome pecuniary loss and provide support when it is needed most. But the failure of the policymakers to assess the actual market-driven demand factor, in terms of number of insurance firms, coupled with regulatory weaknesses, has given rise to a very difficult situation in the industry. Without some immediate corrective measures on the part of the government, the state of affairs might turn even worse. However, the plight of the policy-holders in rural areas, who are now at risk of losing their money, needs to be looked into by the relevant quarters on a priority basis.