Banks as insurance brokers is a messy idea

The Finance Ministry’s recent directive to public sector banks to become insurance brokers, instead of remaining corporate agents, has stirred emotions and disturbed many bankers and insurance company executives. A corporate agent represents one insurance company whereas a broker represents many companies.

Ostensibly, the move is to help increase penetration of life insurance and reduce mis-selling. And the customer may have a greater choice of products at the point of sale (bank branch). The objectives are as noble as they come. However, there is a suspicion that this order is in reality meant to help one company that has been unable to get its sales and distribution act together.

Forget the whispers of mala fide for a while (in election season, these abound) and look at the merits of the case. Many insurance companies have already appointed banks as agents (since they are also, in many cases, promoted by banks). Now, the Ministry wants these banks to sell insurance policies of more than one insurance company.

The spectre of compulsion has created deep unease in both the banking and insurance industries.

One executive puts it wittily, “Why is the government forcing me to have affairs, when I am perfectly happy in my marriage?” Touche ! It would have been preferable to leave the choice to bank boards on what model they want to adopt.

Regulations on banks acting as brokers are also unfavourable in many ways. There is a cap on business from one client (50 per cent ) and on business from the promoter group (insurance company) at 25 per cent.

While this does seem prudent from a risk management point of view, it also militates against common sense from another angle. As one top executive puts it, “Why would I put in so much capital and effort in order to see these bank branches sell just 25 per cent of my products while they earn 75 per cent of income from my competitors’ products?” Valid point.

Industry executives also question how the move would lead to better efficiency or penetration of an admittedly underserved market. If a bank branch cannot sell enough policies of its promoter insurance company, how is it going to sell policies of rivals?

Already, the bancassurance model (involving use of bank branches to sell insurance) in India has not had any spectacular success when compared to the proven model of tied individual agents. The received wisdom has been that there is little skin in the game for branch managers to sell insurance.

After all, he or she does not gain anything by selling insurance — at the most, he may get a few extra marks in his appraisal. In contrast, for tied agents, their livelihood is directly linked to sales commissions.

Besides, for banks and insurance companies, there are also issues of technology investments and training of workforce. Even integrating one insurance company’s systems with a bank’s core banking system can take months and is often riddled with hiccups.

So, the difficulties of doing that with four or five companies can be imagined. Ditto for training branch staff in the product knowledge of four-five insurance companies.

It is clear that the directives were framed without suitable application of mind and without reference to ground realities. It is disappointing to see the Indian Banks’ Association (IBA) pussyfooting and lobbing the ball back to individual bank boards on an issue has actually annoyed many.

It is time for the Finance Ministry and the RBI to undo the damage right away rather than allow this vitiated atmosphere to continue.