Bancassurance has under-delivered till now. Mis-selling by untrained personnel, fat upfront fees from insurers—ultimately drawn from customers—and lack of customer service has been ailing the ‘future’ of the insurance distribution channel

The Insurance Regulatory and Development Authority (IRDA) had set up a committee in 2009 to look into how the bancassurance channel can be more efficiently utilised and re-engineered to meet the needs of tomorrow. Based on the recommendation of the committee, banks may soon be allowed to sell products of two sets of insurers—two in the life insurance sector and two in the general sector, as opposed to banks currently selling products of one life and one general insurer.

The committee report clearly suggests that the banks have a lot of catching-up to do on the productivity front. They would also be well-advised to allocate a greater share of their resources to bancassurance activities, since these banks are ideally positioned to leverage on their existing clientele for distribution of insurance products at a negligible additional cost.

The report quotes Deepak Satwalekar, former chief executive officer, HDFC Standard Life, "Banks are unwilling to assume any responsibility, or risk, of the result of their mis-selling. The RBI (Reserve Bank of India) is also wary of banks taking on the role of a 'broker' as it would mean that they assume the role of a 'principal' in the sale process with the consequential responsibility and potential risk. Possibly, banks are better aware of the deficiency in the sales process practised by them and hence their reluctance to assume any risk arising thereon. It is rather unfair that banks expect insurance companies to assume the risk arising out of their deficient sales process. If bankers believe that they are well-trained professionals, they should have no hesitation in taking on the liabilities arising from their sales."

Hefty fees

The report states that several banks charged hefty fees for entering into the referral agreement, over and above the fee which was linked to sale. Further, upfront fee was being collected for providing infrastructure for locating an insurer's staff and advertisements in bank premises. IRDA had earlier issued guidelines on referral arrangements. Most insurance companies are circumventing the Referral Agreement circular No. 004/2003 issued by the Authority by interpreting the wordings to their advantage, thereby paying the higher referral fee to the banks.

The regulator is concerned that the iniquitous relation between the insurers and the banks will ultimately put the insurers at risk of under-pricing the risk of doing business and overcharging the customer to pay the banker. The insurer ends up paying a fat upfront fee running into tens of crores of rupees. At least 1/4th of the prospective business, training costs, infrastructure costs, bank brochures, expenses towards transactions, incentives, travel, and entertainment for the bank staff are some of the heads under which the insurer is fleeced. The accounts at both ends are opaque and the payouts exceed the prescribed commission by a large measure.

Mis-selling

Due to the asymmetry of the relationship, an insurer has hardly any say in the manner of marketing of their products. The regulations prescribe that insurance products have to be sold only by trained persons. Only persons familiar with features of the products and the risks they cover can do justice to the customers.

Banks at present do not have trained persons in all branches, which means that solicitation is happening through untrained personnel. This opens up the possibility of mis-selling by bank staff, which in turn shifts the liability to the insurance company. The risk of mis-selling and the insurer being held liable is higher in products which also have savings features. As banks are not directly under IRDA for regulatory purposes, this poses a challenge to the insurance regulator in the prevention of mis-selling. Opening up the sector for multiple tie-ups for banks with insurers carries the danger of aggravating the problem of mis-selling by banks.

Regulations shall mandate that the bank staff be fully trained in handling insurance products so that the sale process is transparent and the policyholder gets full disclosure of the features of the product. There is a need to strengthen the certification criteria for bank sales personnel for the purpose of selling health insurance, ULIPs (unit-linked insurance products), pension and other complex products. One-time rigorous training may be given to the sales personnel of a bank, with added stress on complex products. The training of bank staff is an important task of the insurer and the substantial sales force of the bank can be trained only in a phased manner because of business contingencies.

Hence, the substantial initial period of the tenure will elapse before a banker is equipped with the necessary skills and the ability to sell insurance products in a proper fashion. Further, as the term of an agreement nears the end, the banker looks forward to new tie-ups which will provide them with higher income. This will put the relationship in cold storage even before the agreement has come to an end. In order to ensure that the instability does not affect the relationship between the banker and the insurer, the committee has recommended that the tenure of the agreement between the banker and the insurer shall be not less than five years.

Lack of customer service

The data on bancassurance reveals the preponderance of single-premium products.  This brings in the aspect of service to be provided by the bank as an agent to the policyholder. An agent is supposed to be accessible to the policyholder and be an active interface and facilitator on all policy or claim-related matters. The exclusion of regular premium products from this channel can well be an indication of deficit in the servicing aspect of insurance. This can also mean that the bank channel is more focused on new premiums, which results in higher commission. Till recently, the tie-ups between banks and insurers lasted for a year or two. The short term of the tie-up resulted in the major burden of servicing falling on the insurer. This also prevents an insurer from taking a long-term interest in training of the bank staff in insurance-related subjects. This has also resulted in many policies going 'orphan' when the tie-up ends. The bank customer, being loyal to the bank rather than the insurer, has also resulted in the switching of an insurer by the policyholder along with the bank.

This has pushed the insurer's costs upwards as first-year expenditures are typically much higher. This militates against the long-term nature of the insurer's business model and is a cause of concern for the regulator.