In a judgement by judges Sunil Ambwani and D.K. Upadhyaya of the Allahabad High Court, SBI Life Insurance has been reprimanded for ruining the savings of an old man, and the IRDA has been asked to scrutinize every policy of SBI Life, even to wind up the company if more such cases were found.

The case: Virendra Pal Kapoor in 2007, then 65 years old, took a single premium five year insurance policy (Unit Plus II) paying Rs. 50,000. In 2012, he was offered the princely sum of Rs. 248.

Why? Because his insurance cover was Rs. 3.125 lakh, or 6.25x his premium. He had the choice of taking 1.25x his premium and 6.25x, and his agent opted for the 6.25x, but didn’t explain to Kapoor the impact of this choice.

Insuring for 6.25 lakh would have cost Rs. 3,000 per lakh per year. Which means a sum of Rs. 9,000+ per year would go only to insure the customer! In five years, that adds up to Rs. 45,000+ as mortality charges alone! And take out commissions and you have next to nothing left!

Why does a 65 year old need insurance cover of that much? He doesn’t, and the court agrees. Kapoor never really intended to buy the policy as insurance. And the literature wasn’t clear how bad the policy would be as an investment if he took the full 6.25x cover.

Further the policy was supposed to be automatically terminated when the funds reached 10,000. This was overriden by the company which only sent a written note to customers – but any change to a contract needs the signature of all parties, and they never got Kapoor’s okay.

The judges have dinged SBI Life for allowing such a policy to be sold, and for not following rules. It was obvious Kapoor wouldn’t have invested if he knew so much money would go to paying insurance cover, and SBI never tried to make it clear. And the whole unilateral information to unprotect the policy below Rs 10,000 is really shady. SBI has been told to return the full Rs. 50,000, plus Rs. 10,000 to cover costs. It’s appealing the order in the supreme court.

The judges have also told the IRDA to examine all policies sold by SBI Life and if it finds such irregularities it can even wind up the business of the company if so.

Here’s the full judgement (on May 29, 2014):

My take

SBI will keep this issue under wraps. If they have to repay all those who invested in 2008, with more money than they have, they will lose so much they might just about die. So they’ll fight back.

But this is a problem. Why is a 65 year old sold insurance? Is there no fiduciary duty on the party of anyone? The bank, the insurance company, or the individual agent? Currently, no.

Because Bancassurance – the concept under which banks sell insurance – absolves banks from the responsibility of actually giving their clients products that suit them. Essentially, they need not have the best interest of their customer in mind.

This is absolute bollocks.

Banks need to be accountable for the misselling of their bank managers. If it means that banks can’t, and therefore won’t sell insurance, that is okay. The RBI should enforce this immediately along with the new government, that bank misselling can be fined.

And then, IRDA needs to be changed, or energised, or whatever. They are a crap regulator. In this case, they were asked to help, and they replied with platitudes. They need to to disbanded at the very top and a non-insurance related officer should head the organization. The government needs to remove the Rs. 500,000 cap on the fine per offence – it should be compounded (subsequent similar offences should go into multiples) and the limit should be related to the offence. And, they should fine banks for mis-selling.

Otherwise we will continue to find banks conning customers. I’ve written about HDFC Crest, which it seems was missold to many unsuspecting customers by HDFC Bank officials. If HDFC Bank and their board of directors was fined for each such offence, the misselling will stop immediately.

Insurance will continue to suffer, as more Indians get online and do simple Google searches before buying. And then, they’ll know how bad it is.