Irdai unlikely to act against bancassurance despite mis-selling fears

Insurance regulator finds bancassurance mis-selling not alarming and rules out coercive curbs while continuing to advise insurers to list for transparency and governance

In a major relief to life insurance companies, especially those in the private sector, the Insurance Regulatory and Development Authority of India (Irdai) is not in favour of taking any coercive action against the bancassurance model of distribution as it believes that mis-selling through this channel is not as alarming as it has been made out to be, a source privy to the development said.

 

“…distribution cannot be mandated, it can only be facilitated”, the source said.

 

Since last year, there has been a lot of discussions around mis-selling of insurance products through the bancassurance channel, with the finance ministry, Irdai, and the Reserve Bank of India (RBI) governor weighing on the issue. Recently, Department of Financial Services (DFS) Secretary M Nagaraju mandated banks to ensure that there is no mis-selling of insurance to customers, and that premiums are affordable in order to help increase penetration for such products.

 

In December 2024, both Finance Minister Nirmala Sitharaman and then Irdai Chairman Debasish Panda had expressed concerns about mis-selling, or forced selling of insurance products via banks, and stressed the need to restore customer confidence in the system while urging lenders to focus on their core banking services.

 

Interestingly, in its annual report, the RBI mentioned that it is working on issuing guidelines to address mis-selling of financial products and services by regulated entities, which include banks and non-banking financial companies (NBFCs).

 

Meanwhile, several reports had pointed out that taking cognizance of the worries around mis-selling, Irdai could introduce a cap on how much business an insurance company can generate through bancassurance channel. If that were to be, analysts had estimated that it could potentially shave off 15-30 per cent of banks’ fee income that they earn by selling insurance, which would then have a bearing on their net profit by 1-2 per cent. Bancassurance has generated more than ₹14,500 crore commission income for the banking sector in India, representing 2 per cent of their total revenue in 2023-24 (FY24).

 

Bancassurance is a partnership between banks and insurance companies to sell insurance products through bank branches. According to the Irdai annual report for FY24, the total number of grievances under unfair business practices (UFBP) of life insurance dropped by 10.62 per cent to 23,335 from 26,107 in FY23. 

 

In October 2023, Irdai had formed a task force to review the existing bancassurance framework, and improve the efficiency of the same amid complaints of mis-selling.

 

Separately, the source quoted above said that Irdai has so far not mandated insurance companies to go public.

 

“We will continue to drive the advisory to insurance companies. Listing primarily has two objectives — transparency and governance, which is the larger objective, and then capital. Capital has not been an issue anywhere in this industry. Governance and transparency comes through disclosures, and we as regulators have been mandating quite a few disclosures with insurance companies,” the source said.

 

Irdai, under the chairmanship of Panda, held talks with select insurance companies, nudging them to go public, given their size and vintage. The regulator had asked them to prepare a road map for the same as it would bring greater transparency and more value to policyholders and investors.

 

This was because only a handful of insurance companies have gone public despite the industry opening up two-and-a-half decades ago.

 

Currently, there are five listed life insurance companies — Life Insurance Corporation, SBI Life Insurance, HDFC Life Insurance, ICICI Prudential Life Insurance, and Max Life Insurance (through Max Financial Services). And, as many general insurance companies have also gone public — New India Assurance, ICICI Lombard General Insurance, Star Health & Allied Insurance, Go Digit General Insurance, and Niva Bupa Health Insurance. Additionally, state-owned reinsurer General Insurance Corporation is also listed. 

High stakes

 

*  In FY24, Bancassurance generated more than ₹14,500 crore commission income for the banking sector

  *  RBI is working on issuing guidelines to address mis-selling of financial products by regulated entities

  *  In October 2023, Irdai had formed a task force to review the bancassurance framework and improve its efficiency