Home / Opinion / Banks fight to stay irresponsible

Theoretically, it makes perfect sense. Banks have the branches—all 88,562 of them—across the length and breadth of India. Insurance companies find distribution tough through individual agents. Bank customers largely trust their banks in India. Put all three in a box and shake, and you have the bancassurance model, where insurance companies tie up with banks so that banks can cross-sell insurance policies to their existing customers—that is, you and me. So why’s there a bad smell around bancassurance and why has it taken a nudge from the ministry of finance to push the banks to become brokers?

The story so far. As they got into business and entered the turf of the state monopoly, the mammoth Life Insurance Corp. of India (LIC), private sector insurance companies found it tough to reach clients using individual agents who have been LIC’s mainstay in selling insurance. Agents were expensive to train, and fickle. An alliance with a bank would solve a big part of the distribution problem and insurance companies rushed to tie up with banks to sell life insurance. Speed was of essence since the existing regulations allowed banks to operate under the corporate agency model; that means that the bank would be the agent of the life insurance company. All good, except that the Insurance Act ties an agent to a company—so one bank could sell products of just one insurer.

Both insurance companies and banks wanted the architecture to loosen up a bit so that products of more than one company could be sold by a bank. To solve this problem, the insurance regulator set up a committee on bancassurance in 2009. It was expected that the committee would recommend a change in the business model by asking banks to become brokers instead of being agents.

A broking model would allow a bank to sell products of as many insurance companies as it wanted. But a strong opposition by banks and refusal of the banking regulator to allow banks to take this additional risk on themselves (as brokers banks would become responsible to the customer for their sales and advice) resulted in a fractured committee. Despite strong dissent from some of the members, the committee recommended a model that allowed a bank to have two tie-ups. One bank will be able to tie up with two life, two general, and two health insurance companies. The draft bancassurance guidelines in November 2011 finally suggested a strange spectrum like allocation of regions to insurance companies. In a dissent note, the then-chief executive officer of HDFC Standard Life, Deepak Satwalekar, wrote: “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 (Insurance Regulatory and Development Authority). Hence, permitting banks to appoint two insurers, albeit in different geographies, would be like legalizing their extortion."

Nothing happened for two years after the draft guidelines and now two years (and a 1.5 trillion mis-selling loss faced by retail investors due to lapsed insurance policies and the Cobrapost sting that showed banks using insurance products to offer to launder money) later, the writing on the wall is getting clearer. Irda, in an August notification (read it here: http://bit.ly/1fa4VbX), allowed banks to become brokers. The Reserve Bank of India (RBI) released its draft guidelines on 29 November 2013 (read it here: http://bit.ly/JER9jr) for the entry of banks into the insurance broking business. But nobody expected banks to convert their no-responsibility, all-commission business model to one with fiduciary responsibility. Enter the ministry of finance, which sent a note on 20 December to the heads of all public sector banks asking them to “dispense" with the current agency model and adopt the broking model.

The story now. The expected reaction has come in from the banking lobby, the Indian Banks’ Association (IBA). A reading of the minutes of the first meeting of the sub-group to discuss the issue shows clearly that banks do not want to take on the responsibility while enjoying the commissions. The IBA argument is this: banks will have to rework their business deals with insurance companies, banks will have to train their staff, banks will have to become responsible for what they sell, banks as brokers will get only 30% commission instead of 35% under the agency model. “…the responsibility for the insurance product sold would shift from the insurance company to the brokers. The resultant fiduciary responsibility on the banks would worsen their risk profile."

What’s at stake here? For 2012-13, the total share of individual first-year premium from bancassurance was just over 16% for the industry, but for private companies (unlike LIC at 3%, which remains focused on its agency channel), the share was 43%. This translates into a base level of earning of at least 1,500 crore for the banks as commissions. The marketing and administrative expenses are borne by insurers in addition to this pure commission revenue. And this is easy money for the banks since there is no responsibility associated with the sale of the products.

What next? If the Delhi wires are to be believed, then there are enough indications that the finance ministry, RBI and Irda are working together to get the banks to clean up their act. The guidance to public sector banks is most likely going to be extended to private sector banks as well. Watch out for some very heavy lobbying to prevent this from happening.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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