For many Indians, trust in their bank is built over decades. But when that trust is leveraged to sell insurance products that may not suit a customer’s needs, the line between fiduciary advice and sales blurs.
The bancassurance model—where banks act as agents for insurance companies—comes with a structural conflict of interest. Customers often walk away with policies that do not align with their financial goals.
The Reserve Bank of India (RBI), in its new draft rules, has called for significant structural changes to curb mis-selling. While experts Mint spoke to do not expect a sharp dip in sales, they anticipate tighter scrutiny and changes in incentive structures.
Structural conflict
The problem lies in incentives. Bank relationship managers are often pushed to prioritize insurance targets over customer suitability.
According to Manju Dhake, head of insurance advisory practice at 1 Finance, a personal finance advisory firm, the issue is:
“In a distribution-led model, product suitability often takes a back seat to sales incentives. Customers, who place significant trust in their bank, are left holding products that don't serve their financial goals.”
Prof. Manoj K. Pandey, associate professor at BIMTECH, says the conflict is embedded in the model itself. Many banks are promoters of insurance companies, creating a vested interest in pushing group products.
A report from 1 Finance states:
“Banks may earn as much as 65-70% commission on first-year premiums from selling insurance policies, including the policies manufactured by their related-party companies.”
“Mis-selling and forced selling are longstanding problems rooted in structural conflicts of interest,” Prof. Pandey notes. He adds that banks, acting as corporate agents, lack the fiduciary duty of brokers, often leading to situations where the bank mis-sells but the insurer bears the brunt.
Regulatory course correction
The RBI has introduced draft rules—expected to be implemented by July this year—modelled on global best practices. The focus is on suitability assessments, incentive reforms and enhanced supervision.
Anupam Tyagi, internal insurance ombudsman at Star Union Dai-ichi Life Insurance, views the move as a “natural evolution” rather than a clampdown, noting that the regulator is not looking to dismantle the model.
“I see these guidelines as a constructive step,” Tyagi said. “When the regulator talks about a suitability check, banks must now implement mechanisms to verify if a product aligns with a customer's age, risk appetite, and earning capacity.”
The measures seek to address aggressive sales tactics such as linking insurance sales to performance appraisals or offering foreign “training” trips to bank officials—practices that Prof. Pandey says have distorted the market.
He argues that regulators were “silent observers” during a period when banks relied heavily on fee income to cover NPAs (non-performing assets), but now that the sector is more stable, the push for transparency has intensified.
Execution challenge
Much will depend on implementation. The draft rules not only call for curbing mis-selling by banks but also require insurance companies to establish stronger compliance frameworks, including oversight committees.
Tyagi believes strengthened board-level oversight—such as Public Protection Committees within insurance companies—could improve accountability.
“Any monitoring introduced will obviously help customers and lead to stronger, customer-centric measures,” she noted.
However, experts caution that systemic reform requires structural intent. Suggestions such as capping business sourced from group insurers and delinking insurance sales from employee appraisals are seen as critical.
Tyagi also flags a behavioural gap: Indian consumers who meticulously compare prices for everyday purchases often sign insurance proposals without scrutiny.
“Genuine advice begins where sales incentives end,” said Dhake.
For the bancassurance model to remain credible, industry participants say it must evolve from a sales-driven engine into a service-led advisory system built on transparency and accountability.