Because much of policymaking in India is about lobbying power, we see some strange outcomes. Take the draft bancassurance guidelines, for example, that lay down the rules of bank tie-ups for insurance companies. The weird spectrum-like allocation of banks to insurance companies is a classic example of a compromise that benefits no one and will actually harm the market. Recent events in the bancassurance space that point to some companies tripping over regulatory boundaries corroborate this. The evolution of the November 2011 bancassurance draft guidelines (you can read them here) is the story of a face-off between two evenly matched lobbies. On one side is the insurance industry, with its flagship government-owned default sovereign wealth fund, the Life Insurance Corp. of India (LIC). And on the other is the banking sector whose lobbying power kept our money earning nothing because of a rigged formula to calculate interest rates on savings deposits that were fixed at 3.5% for years. The story of how the draft bancassurance guidelines came to be have enough masala to run a full Bollywood trilogy. But as of now, the banks are ahead.
Graphics: Shyamal Banerjee/Mint
The Insurance Regulatory and Development Authority (Irda) set up a committee in June 2009 in response to requests from the insurance industry to relax the requirement that one bank can only sell products of one insurance company. Banks are corporate agents of insurance companies and, under the Insurance Act, are tied to one company. The committee sat at a time when the relationship between banks and insurance companies had been deteriorating with the latter complaining about the lack of accountability of banks. To understand the problem of bancassurance we need only to turn to the committee report. Page 42 of the report sees the committee agreeing that banks are mis-selling insurance. The committee worries about the unequal relationship between banks and insurance companies and it says: “The insurer ends up paying a fat upfront fee running into tens of crores, at least one-fourth of the prospective business, training costs, infrastructure costs to the bank brochures, expenses towards the transactions, incentives, travel, 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.” Here is a government-appointed committee pointing out malfunctions in the selling of insurance products by banks. Bank staff need to be entertained into selling insurance? Umm, OK, whatever. But the real problem with this upfront fee is pointed out correctly by N.M. Govardhan, ex-chairman of LIC, in an annexure in the bancassurance report: “Excessive upfront payments in any form are to be curbed as ultimately the cost will indirectly fall on the customers as the companies try to recoup the amount spent.” So, you, the consumer, will finally pay.
The report came out in June 2011 and recommended that instead of one tie-up, banks be allowed to have two tie-ups. One bank will be able to tie up with two life, two general, two health insurance companies. But this, according to some members of the committee, was not solving the inherent problem in bancassurance, that of banks having no responsibility on the sales they were making. The solution, according to a section of the committee, was to move the banks from being “agents” to “principals”. This would happen if they would take the broking licence from Irda instead of the corporate agency. Since Reserve Bank of India (RBI) rules prohibit the bank from becoming a broker, banks would need to set up a subsidiary, get a broking licence and then sell products of all insurance companies, not just two or four. Why don’t they do that? To understand that we need only to turn to the dissent note written by Deepak Satwalekar, the retired CEO of HDFC Standard Life Insurance Co. (read annexure 9 here for some straight talk about banks and their regulator), who says: “…as stated by the IBA (Indian Banks’ Association) representative, the banks are unwilling to assume any responsibility, or risk, of the result of their mis-selling. RBI 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 sales process with the consequential responsibility and potential risk. Possibly the banks are better aware of the deficiency in the sales process practices by them and hence their reluctance to assume any risk.”
Banks can sell multiple mutual funds as agents because the industry is open architecture and banks have set up subsidiaries to allow their customers to trade on the stock market. But they are unwilling to do so in insurance because they want the rewards without responsibility. The other option, argued Satwalekar, was to move toward a regime of independent advice with banks getting remunerated by the customer and insurance companies being prohibited from paying any commissions to the banks. A third option that is not going to be acceptable to anybody is this: If banks don’t want to take responsibility, are the biggest mis-sellers in the industry and RBI is afraid for depositors, then banks should not sell insurance. Post-budget, if there is a rethink in North Block on the issue of bancassurance, please do read annexure 9 of the June 2011 bancassurance report for some sensible steps forward.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com
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