RBI’s allows banks to become insurance brokers. Are banks even interested?
It is utopian to expect banks to become insurance brokers, given that banks have neither expertise nor interest to sell insurance correctly
Seeking to increase “insurance penetration” in the country, the Reserve Bank of India (RBI) has allowed banks to act as brokers for insurers, set up their own subsidiaries and also undertake referral services for multiple companies. Banks have also been allowed to set up subsidiaries and joint venture companies for undertaking insurance business with risk participation, the central bank added.
Currently, a bank is allowed to sell the products of only one life and non-life insurance company as a corporate agent. The new guidelines allow banks to act as brokers permitting them to sell insurance policies of different insurance companies. Will the new regulations turn out to be useless? Will banks be interested in insurance broking at all?
While an agent represents the insurer, a broker represents the customer. As such, banks utilise their own customer base and hence they represent the customer. With broking license, they would be mandated to give the best deal and product to the customer. With broking license, banks will have a fiduciary responsibility to customers and can be made accountable for mis-selling.
Bankers and insurance companies have gone into this in details over the years. In a report on bancassurance published in 2011, Deepak Satwalekar, former managing director and chief executive of HDFC Standard Life Insurance Co Ltd, had said it was rather unfair that banks expect insurance companies to assume the risk arising out of their deficient sales process. If the bankers believe that they are well trained professionals, they should have no hesitation in taking on the liabilities arising from their sales, he had said.
He added, “The banks with their ready-made superior distribution network have held the insurance companies to ransom. They have played one insurer against the other in order to ‘extract’ the highest compensation they can get. One hears stories of compensation, either in commissions or as reimbursements in one form or the other, being paid which are higher than that permitted by IRDA. Hence, permitting banks to appoint two insurers, albeit in different geographies, would be like legalising their extortion.”
If banks want to act as insurance brokers, then they will have to train properly, their work force first. At present, several of bank employees are unware of the bank’s own product and charges or fees. So, turning them into responsible insurance broker, with added responsibility and liability would be a mammoth task.
Another issue is even though the RBI has relented and allowed banks to become insurance brokers, how many lenders, which promote own insurance company products, would be happy with it?
Top private insurance companies are backed by banks, which will find a conflict of interest in the broking idea. For example, ICICI Pru Life, SBI Life, HDFC Life, IDBI Federal, SUD Life, Kotak Life and IndiaFirst are backed by banks like ICICI, HDFC, SBI, IDBI, Federal bank, Bank of India, Union bank of India, Kotak Mahindra, Bank of Baroda and Andhra Bank. Some private insurers the majority of their business through the bank tie-ups.
Even RBI's financial stability report’s Chapter III - Financial Sector Regulation and Infrastructure had raised several crucial questions on bancassurance model’s use of unfair and restrictive practices.
• While banks are well suited to distribute insurance products because of their wide network, several issues have risen regarding their conduct in the process, 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).
• According to IRDA’s Annual Report 2011-12, the maximum complaints in life insurance related to mis-selling, mainly pertaining to private sector, although state-owned LIC leads the business with over 70% share. 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).
• 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 financial products for common man to comprehend.
Earlier in 2013, the Insurance Regulatory and Development Authority (IRDA) had allowed banks to become brokers and sell products of more than one insurer to increase insurance penetration across the country. At that time, RBI had opposed the move saying that banks assuming the role of insurance brokers may also lead to conflict of interests.
The new guidelines allow banks to act as brokers permitting them to sell insurance policies of different insurance companies. The guidelines follow an announcement made by the former Finance Minister P Chidambaram in 2013-14 Budget.
There are about 87 commercial banks in the country with 1.2 lakh branches across the country. There are 52 insurance companies operating in India; of which 24 are in the life insurance business and 28 are in general insurance business.