After deliberating for two years, the committee appointed to look at the feasibility of allowing banks to sell products of multiple insurers has recommended opening up of the bancassurance channel in a report released on Tuesday.
Welcoming an open architecture, the committee has proposed allowing banks to sell products of two companies from life insurance, non-life insurance, health insurance, and Export Credit Guarantee Corp. and Agriculture Insurance Co. of India each. Currently, one bank can sell products of any one insurer in the life and non-life segments.
The report has recommended a tie-up for a minimum of five years between the insurers and the bank.
What it means
For you: If the recommendations are accepted, it will mean more choice for customers just like in the case of mutual funds.
For insurers: It will lend them a helping hand in cutting costs in the new regulatory regime; the Insurance Regulatory and Development Authority trimmed the expenses of the industry last year. The industry can use the 80,000 bank branches in India without affecting costs much.
Says Suresh Agarwal, executive vice-president, Kotak Life Insurance Co. Ltd: “The cost of setting up a distribution network is very expensive. In the case of tied agency, we have to open branches and set up office, which is capital intensive. However in bancassurance, there are no expenses as it is a ready platform and has captive customers.”
So far, the insurance industry hasn’t tapped the bancassurance model and is largely dependent on the agency model. But in an environment that does not support huge commissions and expenses, insurers have been forced to cut down on their agency channel and tap other distribution channels. According to the Life Insurance Council, the number of agents has reduced by 11.11% from 2.98 million in 2009-10 to 2.65 million in 2010-2011.
The present environment doesn’t provide a healthy atmosphere for bancassurance to evolve. The report states the reasons: “The principal ones being the monopolistic relations, low levels of training, lack of operational coordination, unequal relationship, short duration of tie-ups, lack of specially designed products, non utilization of technology platform and poor servicing standards prevailing in bancassurance channel.”
The report has proposed to work with the Reserve Bank of India to look into compliance and tackle fraudulent practices. The 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 on features.
In fact, the report also proposes to give a one-time rigorous training to the sales personnel of banks to equip them to handle complex products.
The report stresses the need for stricter certification at renewal of agents’ licences and proposes that banks should market insurance products only in those branches where a specified person is posted. But insurers are unclear on the cost of training. Says Agarwal: “Currently, just like corporate agents, insurers bear the cost of training bancassurers. But moving on we will have to arrive at an understanding regarding costs.”
Industry has mixed views
The industry is divided as far as adopting open architecture is concerned. Interestingly. insurers who do not have a bank partner are optimistic about it, while those having a banking partner advise caution.
Says T.R. Ramachandran, managing director and chief executive officer, Aviva Life Insurance Co. India Ltd, a joint venture between Dabur Group and UK-based Aviva Group: “Now banks can only be corporate agents and not referral agencies. So the bank personnel selling insurance products need to have the requisite licence and knowledge to sell. Other than that, it is the wide array of choices that banks will be able to offer just like in the case of mutual funds. So open architecture allows banks to give customers a product that suits him since every company will have some specialization and the bank can pick the right product.”
However, worries G.V. Nageswara Rao, managing director and chief executive officer, IDBI Fedral Life Insurance Co. Ltd: “The real danger is that banks need to be able to sell products that are most suitable to the customer and not be motivated by commissions. Hence, it is important to ensure that when open architecture is introduced, the interest of customers is protected rather than make it a commission-driven game for the bank.”
The report is available on www.irda.gov.in and is open for comments till 10 July.