BackWhat shape bancassurance will take
So far, banks in India have been distributing insurance as corporate agents of insurance companies
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The recent report on the finance ministry’s direction to the Insurance Regulatory and Development Authority (Irda) to re-examine the draft of the proposed regulations on bancassurance provides a timely opportunity to look into what led to this development.
What is bancassurance?
Bancassurance, which is banks hawking insurance services, can take various forms ranging from banks owning insurance companies to banks distributing insurance services. However, bancassurance is more commonly understood as banks being distributors of insurance services.
Banks are in the business of providing one form of financial service (that is, banking) and hence are considered by some experts as the right intermediaries for another financial service, insurance. This stems from the simplistic logic that what is good for the goose is good for the gander. The logic can be as faulty as any other simplistic logic. Insurance and banking are in reality at two ends of the financial services spectrum. Banking is largely a funding intermediation mechanism with one set of customers providing funds for another set of customers (of course not necessarily different). Insurance, on the other hand, is a risk acceptance mechanism. Again banking is largely asset focused, while insurance is largely liability focused. It is far more complex to estimate liabilities than to value assets. However, compared with fund-based activity which entails some risk, fee-based activity of distributing insurance is indeed attractive for banks.
How has bancassurance fared?
So far, banks in India have been distributing insurance as corporate agents of insurance companies. The recent controversy over unit-linked insurance plans (Ulips) brought to the fore the possible dominant role of banks in mis-selling insurance and highlighted the grave reputation risks banks face as insurance agents. But in this closed-end model as agents, the consequences of the acts and omission of banks fell largely on the principals, that is, the insurance companies.
However, Irda has in the recent past imposed hefty penalties on some bank as corporate agents for breach of regulations. Thus, banks that are largely regulated by the Reserve Bank of India (RBI) and were hitherto considered as within the domain of penal action by RBI have opened themselves for punishment by Irda as well. It is not clear whether RBI has reacted to this development favourably. Interestingly, just a few years back, Irda did not seem to take kindly to the Securities and Exchange Board of India’s (Sebi) efforts in trying to directly discipline insurers on the Ulip issue.
The new model
A new dimension to the issue was added with the proposal in the Union budget 2013 to allow banks to set up insurance broking entities. This opened up possibly a Pandora’s box. The broking model is an open-ended model. A broker is a representative of the customer and is liable for professional negligence and hence a bank setting up a brokerage arm will open itself to professional negligence and liability. It is not clear how RBI has reacted to the possibility of banks being exposed to professional liability in the open-ended model.
However, Irda’s new draft regulation has little to do with the 2013 budget proposal of banks as brokers. It is a re-hash of the corporate agent model. The draft, among other things, allows a bank to be the agent of more than one insurance company of a kind (unlike only one of a kind in the present regulations) but restricts it to operate in up to 20 regions (and not all of India at present).
Implementation of such a model can be a regulator’s nightmare. It is also not clear whether such “rationing" will help the avowed aim of improving the abysmal insurance penetration in the country. A suggested course of action could be having another round of extensive interaction with RBI to know how far does the banking system find the model helpful and “implementable" and what modifications are required. Time will have to be given to RBI to interact with banks and come out with its suggestion after studying the pros and cons. This will also give Irda an opportunity to emphasize that bancassurance is not merely selling insurance products but also understanding underwriting and rendering after-sales service, including guiding the customer on claims. Imparting these skills to bank employees is a major challenge and involves massive training and retraining. There is cost and time involved. But a trained market force will help reduce mis-selling considerably and thus reduce reputation risks for the banks. If banks want to sell insurance, it is important that they must understand insurance fully. There are no short cuts. The positive side is that given the generally good quality of bank staff, insurance training does not pose an issue.
Now that the finance ministry reportedly has directed Irda to put the draft on hold, it certainly is useful to watch how the story unfolds in the coming months. It is not going to be a short haul.
K.K. Srinivasan is former member, Irda.
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