Why Need Based selling is important in Life Insurance Sector?

Some of you would have read that India’s insurance regulator would be using the power of comic books to drive home the basic concepts, needs and importance of insurance in one's life, starting right from the school level. The Insurance Regulatory and Development Authority has readied comic books and hand-books for high school students. They will be distributed in select schools and later scaled up.

The books will contain attractive stories which will try to weave the basic concepts of insurance, products, both traditional and unit-linked, the need for insurance and how to address problems and what mechanisms to choose.

“I believe that children should be made aware of the basics of insurance so that they can be financially-informed adults later,” opines J. Hari Narayan, Chairman, IRDA.

In a new approach, the IRDA plans to catch them young to promote insurance. In the last few years it has been making efforts to simplify procedures, policy documents, and so on to help customers. There is more. “We have asked the Central Board of Secondary Education and State boards of intermediate education to introduce insurance in curriculum,” Hari Narayan said.

Efforts are also on to launch an educational course in insurance, he added. This can also help youth from the rural areas to take up insurance agencies.

The objectives of the initiative are simple. As insurance is a complex subject with much scope for mis-selling, catching educating the young in insurance concepts augers well.

But is this enough to avoid mis-selling? Not really as there are at least two parties involved in any sale. Therefore, empowering just one is not enough.

IRDA is, therefore, following a two pronged strategy, the other being formal introduction of needs based selling. The idea behind this is not just empower the seller and the buyer, but to extend it up to the boundary which encompasses the entire sales process.

What is needs based selling?

I am sure you are familiar with the phrase, “I could sell ice cubes to an Eskimo.” First, allow me to personally congratulate anyone out there who has sold ice cubes to an Eskimo, for I believe this to be quite a difficult task to accomplish.

You would have to be one heck of a sales person to accomplish this, but why would anyone waste their time selling somebody something they didn’t need?
First of all, imagine how long it must have taken to pull off a sale like that, I doubt the Eskimo jumped at the chance, it must have taken a lot of persuasion on the part of the sales person.

Second of all, the Eskimo doesn’t need ice cubes, so why would anyone waste their time selling them to an Eskimo.

Okay, enough about the selling of ice cubes, I think you get the point.
This brings us to the title of the article “Needs-based Selling.” Sell your customer only the things that they need, you will find it to be a much easier sale, and you won’t spend a whole lot of your time selling it.

If somebody told me that they sold a heater to an Eskimo, I would be very impressed, because this person chose their target market wisely, and then sold his customer something that they need and can use.

If I were an ice cube salesman, my target market would be hotels, restaurants, supermarkets, and convenience stores, because they buy bags of ice in bulk to distribute amongst their paying customers. Why on earth would I waste my time selling my ice cubes to Eskimos?

“Needs-based Selling” is selling people the things that they need and can make their lives more convenient. Get to know your customer before you start selling them your products, get to know as much as you about them.

Why need based selling is important?

Need based selling assumes vital importance as it enables the seller to assess the financial health and risk taking ability of the buyer as a prelude to making a sales pitch. By carrying out this exercise the seller is able to actually recommend a range of products suitable to the buyer, thereby enabling the buyer to take an informed decision in final selection of product.

An insurance agent pays P Jagannathan, General Manager of a public sector company, a visit. He is a part-time agent, who in addition to holding a secretarial job, sells insurance as a ‘side-business’. He is not very knowledgeable himself, leave alone being able to assess Jagannathan’s future financial needs. But he does have an inkling of the kind of savings Jagannathan has.

After taking a seat, he fishes out the forms for the policy: it is inevitably a 20-year moneyback with a sum assured of ` 15 lakh. After a spiel about the tax benefits, he proceeds to tell Jagannathan about the amounts he will get at intervals of five years. He deftly sidesteps Jagannathan’s queries about other policies, rates of return, etc. Not being very finance savvy himself, Jagannathan gives in after the agent badgers him a few times.

Eight years after the purchase of the policy, Jagannathan’s daughter gets married. He is unable to withdraw the money accumulated in the policy, because the returns are paid out at fixed, and inflexible, intervals of 5 years - your needs be damned! He rues the day he purchased the policy. The premium payments gobble up a large portion of his savings, but the policy fails to serve him when he needs it most.

Jagannathan’s junior colleague at the office, one Sinha, had also been inveigled into buying a moneyback policy. Sinha found the high premiums so burdensome that he allowed the policy to lapse after two years. But the part-time agent who sold him the policy had no regrets. Not being a full-time agent, he was more interested in making short-term killings by selling the costliest policy to whoever would buy it. And what if most of the policies lapsed after a couple of years? He would have made his money from the first two years commissions.

Jagannathan’s son Girish is a well-placed executive with an FMCG. For some time now, he has been planning to buy an insurance policy. The agent who visits him, S P Sharma, is an ex-banker who took a VRS and turned into an insurance agent.

He begins by performing, what he calls, a Financial Health Check basically a detailed assessment of his financial position. In this first meeting, there is in fact very little selling. Girish finds it to be more akin to a session with a financial advisor.

Some of the questions posed to him relate to his age and that of his family members; whether he has existing cover; how much is he able to save per month; what is his attitude to risk, and so on. Sharma requests Girish to be as truthful with the information as possible, so that the quality of advice offered to him is also accurate.

The questionnaire takes about thirty minutes to fill. Sharma, the insurance advisor, then returns to his office and inputs the data into his computer. In a short while, the software provides a detailed report. It tells what would be Girish’s or his family’s monthly needs in case of different scenarios, like unemployment, disability, critical illness, death, etc. The report also tells graphically the areas where Girish is under-insured.

During the second visit, Sharma, the insurance advisor, presents the report and makes his recommendations to Girish.

Girish does buy a policy from Sharma. It is not inordinately expensive, but is instead based on what his savings are. This elaborate exercise of assessing the customer’s needs and then making a sales recommendation pays off for Sharma well. Since he is an informed agent he can be sure that very few of the policies he sells will lapse, and he will be assured of commissions from each sale for several years.

Following observations can be drawn from the above illustration-

1. The insurance policy sold to Jagannathan did not suit his financial needs. Despite paying the premium installments regularly he was unable to benefit from it at an appropriate time.
2. While Sinha was also sold an inappropriate product, wisdom dawned on him early and he saved himself from the burden of paying premiums by choosing to surrender his insurance policy.
3. In both the instances mentioned above, the persons who bought insurance policies did not derive the requisite benefits whereas their insurance agent earned commission from his company on these sales.
4. Other than the loss suffered by Sinha on account of surrendering the insurance policy, the insurance company which sold the policy to Sinha also suffered a loss on account of non receipt of future premiums, in anticipation of which the insurance agent was paid high front end commission.
5. It is only in the case of Girish that all parties involved in the transaction would benefit from it.              

Role of an agent

As per the draft guidelines put out on its website by the Insurance Regulatory and Development Authority, life insurance companies will have to provide a standard proposal-cum-need analysis form to the customer at the time of sale.

The need analysis form would require the agent to collect details such as the customer’s profile (age, annual income, financial resources used for purchase of the particular product, etc), risk appetite and financial goals.

Based on this information, the agent or broker will suggest policies best suited to that particular customer.

The agent will also inform customers of the features and benefits of the products and of the various charges such as surrender and administration charges.

Call it the ‘prospect product matrix’, then. “The objective of these draft guidelines is to set standards and procedures for development and implementation of a board-approved prospect product matrix by insurers, which shall be followed by the direct sales personnel of insurers and their agents and brokers,” said IRDA.

The guidelines will be effective April 1 this year. The changes will apply to life insurance policies to start with and later extended to non-life policies as well.

The stated intention is that it will not be a call of policy holders alone when it comes to choosing an insurance product. Rather it will depend on the profile of the policyholder, recommended by the agents.

The guidelines come with examples for ease of understanding. Here is a sample. “Rajan (name changed) is 28 years old, single, earning ` 6 lakh per annum. He is supporting his parents financially and will also have to take care of his sister’s marriage. This means Rajan has tremendous financial responsibility and his demise will be a big blow to the family. So, for the financial safety of his family he needs life cover. The ideal product in this case would be a term assurance plan.”

 

What an agent and his prospect must know

 * Need-based analysis made mandatory
* Agents to recommend products based on the need and suitability of the customer
* Proposal-cum-needs analysis form to be filled up by customers
* Customer will have to file a declaration, if he/she decides to buy a product that is not recommended
* Guidelines will be effective from April 1

Or, if Mr. Rajan Tewari is married and plans to buy a house after 10 years, for which he would require ` 20 lakh at that time. The suitable product for him would be a regular premium unit-linked insurance policy (ULIP) with some mortality cover.

The underlying purpose of these guidelines is to ensure an agent can't just push a product where the commission is higher. In other words, need-based selling will be made mandatory, wherein insurers will have to go for “fact-finding” before selling the products. The policy recommendation would be guided by criteria such as age, risk profile, financial situation, investment objectives and investment experience, IRDA said.

After closing the sale, an agent or a broker will have to certify that the product recommended was suitable for the customer and based on the information submitted by him/her. Similarly, the customer will have to file a declaration, if he/she purchases a product that is not based on the recommendation of the insurer or the agent.

“It is important and necessary for insurers to have in place a suitability index (or a prospect product matrix) that can serve as a self governing tool to assess the quality of sale,” said J Hari Narayan, chairman.

According to the guidelines, insurers and agents will have to adopt a standard ‘Proposal-cum-needs analysis form’ prescribed by IRDA.

Insurers, while welcoming the step, said the fact-find form or the need analysis form should not be standardised and should be kept separate from the proposal form.

The Ground Reality

Need-based selling concept is an internationally followed best practice. Hence, it is a welcome step. However, companies should have some flexibility on the format on need-based analysis, as norms followed by a sales force varies across companies. Also, the proposal form should come in place only after identifying the need and the solution for a customer. Hence, both the forms should be separate feel insurers.

Howsoever great a concept or an idea might be, a reality check is always essential, for this alone can enable us to foresee the likely future scenario in event of its implementation.

Can we ignore the ground realities? Here are the facts sourced from IRDA’s Annual Report for FY 2010-11.

• While almost 68 per cent of new life insurance business (individual and group) in India is procured by insurance agents and brokers, the share of insurance agents in retail (individual business) stands at 97.5 per cent percent.
• The share of individual agents in new business premium stood at 78.95 per cent while share of banks stood at 13.3 per cent. Corporate agents had 3.56 percent market share while brokers shared 1.77 percent of this business. Direct sales accounted for just 2.42 per cent of new business.
• Among individual agents, agency force of LIC which had under its wings a fleet of 13.37 lac agents garnered 97.45 percent of new business for LIC while for 23 private insurers a fleet of 13.02 lac agents garnered 46.89 per cent of these insurers’ new business.
• With 26.39 lac insurance agents as on 31^st March 2011 on rolls among all life insurers put together, we have the largest agency force in the world.
• What is, however, also to be kept in mind are the following facts

A.   Our agency force comprises mostly of part-time agents, unlike developed economies which have full time agents

B.   Eligibility conditions to become an insurance agent have not undergone any change with the sole exception that an insurance agent must undergo pre-licencing training and thereafter pass the examination as mandated by the insurance regulator before he gets the licence to sell insurance products.

C.   Since the year 2000, when this industry was opened up to allow entry of private players until now, the duration of mandatory training which an aspirant was supposed to complete was first reduced from 100 hours to 50 hours, and subsequently despite a revision of the syllabus which was implemented towards the end of last year, the duration of training remained unchanged.

D.   It has to be understood that while on one hand the new syllabus is more comprehensive than the earlier one, neither have eligibility bar (as regards educational qualifications) nor the course duration have altered.

Further, with guidelines on persistency that are in force since July 1, 2011, reduced incentives payable on sale (read commissions) it is not surprising that there is a flight of agents who are no longer interested in pursuing this profession. IRDA, on the other hand is convinced that the agency channel in its current form will not survive the test of time and if things are allowed to remain the way they are, this distribution channel would eventually loose sheen, ultimately getting relegated into history.

In India, buying life insurance products is largely linked to tax savings, a fact that cannot be ignored. And lest we forget; among those of us who have life insurance policies there would be only a tiny fraction which is adequately insured. How many among us have purchased a pure protection plan (unless forced upon us as a pre condition to a loan) as the first insurance product.  What is required first is the change in mindset of the prospect as well as that of the agent.  Unless mindset of the prospect undergoes a change and he/she is able to separate his/her tax saving needs from risk protection needs, the agent would only end up being the loser with the gainer being another agent, one who is gullible. One can take a horse to water but can’t force it to drink.

There is an interesting incident worth narrating. A middle level manager, extremely upset with his subordinate on not following the instructions he was given, was giving him a dressing down. Unable to bear the shouts of the manager at his subordinate, his boss eventually walked up to him and took him to his chamber. “What is it that is making you so angry” enquired the boss. After the manager explained to his boss his subordinate’s act of non compliance, the boss immediately called the subordinate and enquired why he was not following the instructions given to him. The subordinate quietly replied, “Sir, I am already doing what I’ve been asked to do”. He went on to explain in detail to the boss what he was doing whereupon the boss realised that the subordinate, in fact, had not completely understood the complex set of instructions he had been given. Asking the poor fellow to leave the boss turned to the manager and said, “If only he was qualified well enough to understand what you wanted to be done, he would have been in your place and not where he is now”.

It is entirely up to you what lessons you wish to learn from the above episode.

While no one would dispute that the only constant in our life is change, how gradually or rapidly change comes about, has a profound effect on lives, thereafter. While the importance of need based selling can in no way be undermined, win-win situation for all stakeholders would be possible only if all parties involved are intellectually equipped and prepared for it. Otherwise, it would end up as yet another sheet of paper, which would indeed be a tragedy for a great idea with a noble intent.