The Finance Ministry’s directive making insurance broking mandatory for all public sector banks will reduce insurance penetration contrary to expectations, says S.S. Gopalarathnam, Managing Director, Cholamandalam MS General Insurance.
A qualified FICWA from the Institute of Cost and Works Accountants of India, Gopalarathnam was an active member of the Insurance Regulatory and Development Authority responsible for revamping investment regulations in India, and a member of the committee set up to revamp the motor pool in India. In an interview to Business Line , he said the proposal will bring in diseconomies of scale, especially in rural and semi-urban branches of insurance companies. Excerpts:
The most popular model till now has been the corporate agency model where banks represent one life, one non-life and one health insurance company.
The mandatory broking model will put enormous stress on the banking system, that too at a time when the level of NPAs is high and banks are striving hard to improve their asset quality. Selling insurance will add to their woes.
Hence, I feel this will be a disaster and will, in fact, reduce insurance penetration and result in a significant fall in fee income of banks, too. Mandating one distribution model goes against the business principles of banks. It should be left to the bank boards and CEOs to decide on the model to distribute insurance products – it can be agency model or broking.
Why do you think insurance penetration will come down in a broking model?
This needs to be looked at from a banker’s point of view and insurer’s perspective as well. From the bankers’ side, they need to have trained exclusive resources for insurance selling. This will add to their cost structure. If a bank has 4,000 branches, it has to appoint at least 4,000 people for selling insurance. Furthermore, RBI’s recent circular says that no incentive should be paid to bank staff selling insurance either by the bank or by the insurance company.
Today, banks and insurers offer attractive schemes to ensure insurance penetration and asset protection. Removal of incentives will steeply hit penetration, especially when we see banks pushing 15-20 own products in addition to third-party products.
What other downsides do you see in this?
Broking entails heavy IRDA compliance and legal risks, which will make banks’ processes more burdensome. Dealing with multiple insurers instead of one will mean multiple interactions at the branch level to resolve all insurance business processes, such as cover notes, policies, endorsements and claims. This, besides increasing the workload for bank staff, will also result in ultimate customer dissatisfaction for which the bank may have to pay a price.
Further, servicing responsibility will shift drastically from insurer to bank branches in a broking model. From the insurers’ side, the existing business of one life, one non-life company and one health insurer will get divided into at least four life, four non-life and, may be, half a dozen health insurance companies. This will bring in diseconomies of scale especially in rural and semi-urban branches where insurance penetration is already low.
There is a danger of differential service standards being followed by multiple insurance companies leading to differential levels of customer service for bank customers.
Don’t you think the customer will have a better choice in this model?
No. Even today, insurance buyers, especially of non-life covers, have many choices, such as agents of insurance companies, banks as corporate agents, IRDA-licensed retail brokers, web aggregators, direct websites of insurance companies — the list goes on. With so many competing distribution models, mandating banks as brokers is not going to help the cause of insurance penetration in any way. The customer will now migrate from banks to other distribution channels leading to a fall in bancassurance as a distribution model. All this will finally take a toll on insurance penetration.
ravikumar.r@thehindu.co.in