Of mis-selling and insurance for all by 2047: A bancassurance reality check

How to make bancassurance a genuine vehicle for financial security rather than a source of grievance and distrust

Recent steps by the finance ministry, the Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (Irdai) are charting a path for curbing mis-selling in bancassurance. The focus is on plugging supervisory gaps, making banks accountable for every insurance policy sold through their counters, and fine-tuning audit and suitability checks as well as the incentive structure for bank employees.

 

Suitability check is a process of assessing whether a recommended investment product or service matches a customer’s financial situation, investment objectives, and risk tolerance. It’s an ethical standard designed to protect investors from being sold unsuitable, risky, or unnecessarily complex products.

 

Both the RBI and the Irdai have repeatedly emphasised the need for banks and insurance companies to strengthen their governance and risk-management framework for bancassurance activities, especially after complaints of mis-selling and unfair business practice rose to over 26,000 in FY25, with mis-selling accounting for around one-fifth of life insurance grievances.

 

Bancassurance – a relationship between a bank and an insurance company aimed at offering insurance products to a bank’s customers – has not been actively monitored either by the banking regulator or the markets regulator. The RBI doesn’t come into the picture as the products are covered by Irdai, and Irdai doesn’t act aggressively as they are sold from the bank’s courtyard.

 

The finance minister recently hinted that henceforth, the RBI will deal with any insurance product sold from the bancassurance platform. She said mis-selling is not a grey area but an offence, and that customers should not be made to run between two regulators when products are sold through bank branches.

 

The RBI has already released the draft conduct and sales-practice norms that cover third-party products sold by banks, including insurance. Going ahead, the banking regulator plans to look at the risk-based internal audit (RBIA) system of individual banks to ensure that every insurance product sold passes a strict risk analysis test.

 

The RBIA covers products, processes and deviations in banking practices at every level, but has been silent on the third-party products being sold from branches. It needs to scrutinise the suitability of the insurance products sold to customers and the financial capacity of the insured to pay the premiums.

 

Lack of robust audit systems and risk analysis can lead to mis-selling, making customers who come to branches looking for pure banking services vulnerable.

 

Though there has been persistent dissatisfaction over mis-sold policies, is there any data on the satisfaction ratio of customers being offered bancassurance? There is also no regular audit at bank branches to scrutinise the products being offered, and ensure they are backed by necessary documents.

 

One solution could be mandating that the person selling non-banking products from a bank’s branch carries the unique identity of the “Specified Person” (SP). This system is already in place, but is not followed in spirit. Often, bankers who are not trained or skilled to appreciate insurance products play the SP’s role. Bankers should deal with only banking products; they cannot wear the tag of SP.

 

A recent audit at a public sector bank found that the SP designated to sell an insurance product at a particular branch was posted some 2,000 km away! How did this happen? This SP was allotted to hundreds of branches across geographies. Every application for buying an insurance policy must have an SP number. In this case, the bank was ticking the box by using this particular employee’s number for customers he had never met. This is not a one-off incident.

 

Every product mis-sold hurts the bank’s brand. Banks need to identify areas for improvement, optimise their bancassurance strategies, and ensure that their products meet customer needs, while maintaining their credibility.

 

Conducting regular impact studies is crucial to assess the effectiveness of bancassurance products, both for customers and the bank’s business and credibility.

 

Let’s look at some key metrics and best practices that can be incorporated in impact studies on bancassurance products:

 

Customer acquisition and retention: Track the number of new customers acquired, and the retention rates of existing customers.

 

Product penetration: Measure the percentage of customers buying bancassurance products.

 

Revenue growth: Analyse revenue generated from bancassurance products, and its contribution to the overall bank revenue.

 

Customer satisfaction: Conduct surveys to assess customer satisfaction with bancassurance products and services.

 

Complaint ratio: Track the number of bancassurance products-related complaints received and resolved, and benchmark this against Irdai’s published complaint statistics to ensure that the internal data reflects external reality.

 

The best practices for conducting impact studies could include regular reviews, independent audit, and leveraging data analytics to gain insights into customer behaviour, product performance and sales practices.

 

How should banks go about such a study? With digitisation, it’s not complicated. They need to focus on the following:

 

Data collection: Banks can set up data collection systems to track key metrics, such as customer acquisition, revenue growth, and complaint ratios.

 

Dashboards and reporting: They can create dashboards and regular reports to monitor performance and identify trends.

 

Benchmarking: They can compare performance against industry benchmarks or internal targets, including Irdai and RBI disclosures on complaints and conduct risk.

 

Cross-functional teams: Banks can establish cross-functional teams involving risk, compliance, and sales teams to oversee bancassurance operations.

 

Training and awareness: Regular training of bank employees on bancassurance products, sales practices, and regulatory requirements, including the latest RBI conduct rules and Irdai policyholder-protection norms, will be helpful.

 

Customer feedback: They can create a platform for customer feedback and concerns, such as surveys or complaint resolution processes.

 

A mechanism to audit and scrutinise policies with regular premiums of at least Rs 50,000 or more a year can help prevent mis-selling and ensure suitability. Some key aspects of such audits could be:

 

Customer risk profile: Verify the customer’s risk profile and ensure the product aligns with their needs and financial situation.

 

Income verification: Conduct thorough income verification to ensure the customer can afford the premium payments.

 

Sales process: Review the sales process to ensure it is transparent, fair and compliant with regulatory requirements.

 

Product suitability: Assess whether the product is suitable for the customer’s needs and goals.

 

Documentation: Verify that all necessary documentation is in place, including KYC and policy documents.

 

Indeed, there are challenges. For instance, increased scrutiny may lead to longer processing times and potential delays, and can create operational complexity. Additional checks might impact customer satisfaction, if not managed efficiently. Banks may also need to allocate more resources for auditing and verification processes.

 

But there are solutions. Banks can leverage technology for efficient risk assessment and verification. If they apply risk-based criteria for selecting policies for audit, and communicate the audit process and timelines with customers, things will be sorted out.

 

Currently, Irdai has a uniform 30-day cooling off or free-look period for new life and individual health insurance policies, irrespective of whether they are bought physically or electronically, during which customers can cancel and get a refund of the first premium, subject to certain deductions. The government has asked private insurers to consider extending this free-look period to up to one year to curb mis-selling. Why not remove the limit of the free-look period? This is needed because often, it is found that by the time the victim becomes aware of the mis-selling, there has been too much delay.

 

Also, policy-sellers’ commission could be distributed uniformly through a policy’s lifespan. A hefty one-time commission when a new policy is issued and the first premium is paid is a big incentive for bankers to exploit senior citizens whose term deposits are often converted into life insurance policies. 

 

For proven mis-selling on key aspects, such as income criterion and product suitability, the onus should lie with the bank and the insurance company to refund the amount collected, with the applicable rate of interest on a term deposit, irrespective of whether the free-look period has expired or not.

 

Finally, banks need to look closely at the sales targets set for employees, and the incentive structure. Only then can bancassurance become a genuine vehicle for financial security, rather than a source of grievance and distrust, in the journey towards “Insurance for All by 2047”.

 

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The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo