IRDA guidelines on bancassurance were expected to be released in August 2013, but are now on hold after the Department of Financial Services questioned the rationale of insurers tying up with banks on a geographical basis and asking for wider consultation with stakeholders
The Insurance Regulatory and Development Authority’s (IRDA) guidelines on bancassurance, which were expected to be out by next month have hit a hurdle. The
department of financial services (DFS), which works under the finance ministry, has questioned the rationale of insurance companies tying up with banks on a geographical basis. DFS also wants to have a wider consultation with stakeholders. DFS directive has asked for IRDA’s bancassurance guidelines to be put on hold.
Bancassurance guidelines specify the rules for insurance companies to appoint banks as their corporate agents to sell policies. Currently, a bank is allowed to sell the products of only one life and non-life insurance company as a corporate agent. The proposed draft divides the country into three zones comprising of 40 regions. A bank could tie up with only one insurer for a minimum of 10 regions and a maximum of 20. It means that banks can tie-up with a minimum of two insurance companies while the maximum can be four.
DFS feels that IRDA’s proposal to have a zone-wise tie-up with banks will be complicated. Several banks and insurance companies have raised concerns about logistical problems if the zone-wise tie-up is implemented. But, banks and insurers have their own reasons for either wanting open architecture or to remain with the existing exclusive one life and non-life insurer tie-up.
The insurance companies who are looking for open architecture are the ones who are not promoted by banks and hence have limited bancassurance alliance. Conversely, bank promoted insurance companies would like to have an exclusive tie-up with their parent bank to keep competitors at bay. What is the incentive to be their exclusive corporate agents, considering that banks get a big premium from insurance companies? Insurance companies would rather keep monopoly of exclusive tie-up with their promoter bank and hope that other banks take up a broking license to sell products of multiple insurance companies.
Moneylife is of the opinion that making banks are not accountable to consumers, and going for an open architecture can further complicate the matter. We have highlighted numerous cases of mis-selling of life insurance policies to bank customers? Even senior citizens are not spared; in-fact they are an easy target and are conned by false promises that insurance products will offer better returns than their existing fixed deposits. Young couples fall for expensive schemes that promise to secure their child’s future and buy the products without understanding different charges that decimate the corpus. It is time the DFS addressed these issues rather than restricting themselves to the logistics of bancassurance alliances for multiple insurers.
Currently, bancassurance partners do not own the responsibility of mis-selling as they are mere corporate agents and not brokers. An insurance broker represents customers unlike an agent who represents an insurance company. The Reserve Bank of India (RBI) may not be in favour of allowing banks to set up broking arms as their performance will affect the balance sheet of the bank itself, which will not be in the interest of depositors. RBI had said that banks assuming the role of insurance brokers could lead to a conflict of interests where the bank was also the promoter of an insurance company.
RBI's financial stability report’s Chapter III - Financial Sector Regulation and Infrastructure raises several crucial questions on bancassurance model’s use of unfair and restrictive practices.
Here are some important points raised in the report –
Under the ‘bancassurance’ model, banks in India have been permitted to undertake insurance business as agents of insurance companies subject to certain conditions and without any risk participation since August 2000. As announced in the Union Budget 2013-14, it is proposed to permit banks to act as insurance brokers so that the entire network of bank branches will be utilised to increase the penetration of insurance services in the country. As insurance brokers the banks will be able to sell insurance products of any company, as against the restriction of only one company applicable under the agent-principal model.
While banks are well suited to distribute insurance products because of their wide network, several issues have arisen regarding their conduct in the process, generally pertaining to mis-selling and certain restrictive / unfair practices (such as linking provision of locker facilities to purchase of insurance products, selling of unsuitable and/or multiple policies etc).
It was observed that in some cases, banks did not have clear segregation of duties of marketing personnel from other branch functions and bank employees were directly receiving incentives from third parties such as insurance companies, mutual funds and other entities for selling their products. In some cases direct incentives to the bank staff have created distortions in the sales structure.
According to IRDA’s Annual Report 2011-12 the maximum complaints in life insurance related to mis-selling. They also mainly pertained to the private sector, though LIC leads the business with over 70% share. The type of complaints were mainly in the nature of unfair trade practices and mis-selling of products (e.g. malpractices, actual product sold being different from what was proposed, single premium policy being issued as annual premium policy, surrender value being different from projected, free look refund not paid, misappropriation of premiums etc).
As a significant portion of private life insurance companies use banks as their corporate agents, there seems to be an urgent need to revisit the marketing and sales strategies used by the banks in pushing insurance products, especially since insurance is among the more complex of financial products for the common man to fully comprehend. The limits on commission structure and the operating expenses of insurance companies are laid down in the Insurance Act, 1938 and the Rules framed there under. The compliance with these limits is being monitored by IRDA on an annual basis, and instances of breach are dealt with through penal action. In the recent past, there have been instances of both insurance companies as also the corporate agents (banks) being penalised.