It is that time of the year when people don't buy insurance. The last day for this financial year to end i.e. March 31, 2008, is still some time away. Insurance companies need to offer more than the fantastic commissions to their agents, to motivate them to sell insurance. So what do insurance companies do to motivate their sales force to go out there and sell?
Well run contests with fantastic prizes. The story goes that as a part of a contest, a few years back, one of the largest private sector insurance companies in the country, offered a Cessna aircraft to any agent who got in a certain amount of business, during the period of the contest.
The prizes on offer in these contests during the last financial year, ranged from anything like a Mercedes Benz to a holiday in Europe for two people. The other cars on offer in various contests held during the course of the last financial year were Honda CRV, Ford Fiesta, Chevrolet Aveo, Toyota Corolla, Maruti Swift or even the good old Tata Indica.
And, of course, everyone cannot make it to the holiday in Europe. The lesser mortals have to be content with holidays in Dubai, Bangkok, Singapore and Pataya. Other than this there are smaller awards like mobile phones, iPods and gold coins.
The mutual fund industry is not far behind. A couple of big mutual funds send in their big distributors to watch the cricket world cup in the West Indies. Though it is an entirely different issue that the performance of the Indian cricket team left most distributors disappointed.
Other than this, some of the new mutual funds that launched their schemes during the course of the last year had some interesting prizes on offer for their distributors. Trips to Cairo in Egypt and Istanbul in Turkey were the promised prizes.
Prima facie there is nothing wrong in offering incentives to your sales force. Any form of business that uses a distribution system to reach the end customer has to offer some sort of an incentive, which is adds to the commission on offer. But the point that needs to be kept in mind here is that when it comes to financial services incentives may not work in the best interest of the end customer.
The agents are more likely to sell a mutual fund scheme or an insurance plan on which there chances of winning a prize in a contest is higher rather than what is the right for the consumer.
Let's take the case of term policies in insurance, which most investment experts feel is the only insurance policy worth considering. Term policies are insurance policies, which just provide life cover.
For insurance advisors to be eligible for a prize need to generate a certain amount of new business premium. In most such contests, the premium generated from term insurance is not considered at all or is only considered if it is beyond a certain amount.
Other than this the premiums of term insurance are a lot lower than premiums of other types of insurance like endowment plan or for that matter Unit Linked Insurance Plans. Hence insurance agents have to sell a lot more term insurance policies to generate the same level of business as they can do by selling endowment plans or Ulips.
Given this insurance advisors usually do not like selling term policies. These days they primarily like to sell Ulips, where there chances of getting in more premiums and hence winning a prize are greater.
In case of mutual fund schemes, distributors are likely to sell investors a scheme offered by a new mutual fund, which has no track record, because it is running a contest.
The point is that with such contests and exorbitant commissions in case of insurance, the financial intermediary, need not always sell the right product.
Hence the next time an insurance advisor or a mutual fund distributor makes a hard sales pitch for an Ulip or a new mutual fund scheme, please be careful and do your own due diligence before committing your hard earned money.