Deepening reach?

The debate over banks as insurance brokers

The issue of public sector banks being asked to become insurance brokers, instead of remaining corporate agents, stirred emotions at the Business Standard Insurance Round Table held on Friday. The six insurance industry CEOs present were equally divided on the issue, with a strong set of arguments for and against the finance ministry's directive that was aimed at increasing the reach of insurance. In a country where insurance penetration is 0.8 per cent, compared to 1.5 per cent in other BRICS countries such as Russia and Brazil, opening up the distribution network should be a welcome step, particularly through banks' branches - which have a greater reach than insurance companies.

Why, then, so much heat and dust about a move that is widely expected to curb mis-selling, which has become a major issue - more than 300,000 complaints had been filed till March 31, 2013, in life insurance alone? Detractors of the mandatory banks-as-brokers model point out four reasons. One, there is no empirical evidence to suggest that mis-selling by insurance brokers is any less than that by agents. Two, in the regulations on banks acting as brokers, 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. Why should banks put in much capital and effort if bank branches sell just 25 per cent of their own products? Three, several insurance companies in India have banks as promoters - in most cases, it's a three-way joint venture with two banks and one foreign insurer. When these companies were established, memoranda of understanding were signed with banks that they will only sell insurance products of joint ventures. So what will foreign insurance companies that paid a premium for securing banks as agents do now?

There are counter-arguments as well. The move could 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). Moreover, as insurance brokers, banks will become directly responsible for the sale of insurance policies because they have a fiduciary responsibility towards their clients - the policyholders. As agents, they were only responsible to the insurance company. Thus, though any imposition of a model is to be frowned upon since it raises doubts about its real objectives, a road map for gradual transition to a system where the banking network can be used as a selling route for insurance companies can certainly be explored. There are obvious safeguards that need to be adopted and the regulators have to play their roles firmly but logically. Checks and balances need to be designed, and experimentation is needed. However, ultimately, the bank-as-broker model has to be judged on the basic criterion of whether it benefits the customers of insurance products and services. Apart from the fact that such an open architecture model exists for mutual funds, the entire financial sector is moving towards a common dematerialised account for all financial products. Insurance products cannot have a differential treatment forever.