Banks as insurance brokers: Will consumers benefit?

Reserve Bank of India and Insurance Regulatory and Development Authority of India (IRDA) have recently come up with the idea that banks can sell products of multiple insurance companies, unlike in the past when they were selling only one life product and one non-life product from a single insurance company. This is also known as bancassurance where insurance companies sell their products through banks. Quite popular in Europe, this concept is new in India.

The rationale behind the decision

Since the emphasis is on financial inclusion, RBI and IRDA both want people to take insurance as the penetration is less than 10 per cent. Insurance companies can use the vast network of the banks to push their products in areas where they have no presence. Banks have about 120,000 branches across the length and breadth of the nation. This will help insurance companies cut the cost and banks to earn extra revenue as commission.

Secondly, banks have a presence. The physical presence of it builds trusts in customers, unlike individual brokers who may change places often. This is psychological in nature, but plays an important role in sales of products.

Impact of bancassurance: From banks’ perspective

Banks have given a mixed response to the proposal. Most banks have existing tie-ups with specific insurance companies to sell specifically only their insurance products. This will now have to be reworked.

Moreover, few bank employees have shown concern because they have to push the sale of insurance products. Usually, bank employees are not responsible for sales, so some amount of resistance is natural. Selling insurance is possibly the toughest sales job, further discouraging bank employees from taking it up. Significantly, if the banks want to give the initiative a serious push, they will have to dedicate a sales force for insurance products. In addition, since they will have to move from a ‘corporate agent’ model to a ‘broker’ model, their liability risk would increase manifold.

Quite surprisingly, banks are not baulking at selling insurance. This, despite insurance not being central to their business in any way; ironically, banks outsource their customer verification process (for borrowers) when that should have been their core business process. One possible driver could be the hefty commissions that banks would earn from this arrangement to peddle insurance.

Impact of bancassurance: From customers’ perspective

Prima facie, the decision to have banks sell multiple insurance products looks good on paper because it aims at insuring more people, using the network of banks, and giving more choices to consumers. The reality, however, has shades of grey.

The upside

Currently, independent insurance agents are the main contacts for insurance buyers. Agents belong to only one insurance company and hence they offer insurance from only the insurer they are associated with. This results in agents pushing their products regardless of whether those products are suitable for the customer or not. Hence, misspelling is rampant. Moreover, since the livelihood of agents depend on selling insurance, the agent tries to sell whatever is the current flavour of the market or simply provides higher incentive.

Bancassurance will ensure that customers have access to multiple products and can choose what is suitable for individual requirement of customers. The diversity of products will reduce the cases of misselling.

This will also enable customers from small towns and villages avail a range of insurance products at the nearest bank. Customers will be able to choose the right product. Currently, in rural areas, the agent arrives from nearest town and peddles only one or two products, only to be not seen after selling the insurance.

Finally, with all else being equal, bank employees tend to have better knowledge on average than agents and hence can be trusted to guide customers better.

The downside

Customers in semi-urban and urban areas will find this move redundant since they already have hordes of agents contacting them for insurance, so these customers lack neither in choices nor in accessibility to the right insurance companies.

Secondly, banks too end up misselling the product because of incentives. Many times, customers feel obliged to follow the advice of bank employees because they deal with them very frequently. Banks try to push the product especially to customers who seek loans. This is not mandatory per se but the borrower ends up buying insurance because he feels that not taking insurance may hamper his chances of getting a loan. Even though there are guidelines for banks to treat customers fairly and sell the right product, its implementation will be difficult.

Thirdly, people trust banks. This gives them immense hold on their clients’ finances. It is common practice for customers to solicit advice from bank employees on investment and savings, and even about the products such as mutual funds and stock market where bank employees may know little more than their customers may. This trust has the potential to be abused since hefty commissions are involved in sales of various financial products.

Finally, banks may not have incentive to serve the customers the same way an agent may do. Banks have too many revenue streams and insurance is just one of them. This may not provide enough incentive to provide quality after-sales support.

Tips for buying insurance

“Trust in God but lock your car.” Or so goes the saying. While it is fine to trust your banker, make sure you do your own research on insurance products pushed by the bank. Remember that banks have your complete financial profile, therefore it is easy for them to see the gaps in your investment profile.

“Show me the money.” This is another adage that can come in handy when you decide to buy insurance products from banks. Treat banks as you would treat your insurance agent and ask about returns and past records. There are many websites that can provide you such information.

Finally, if you have to buy insurance from your bank anyway, choose insurance from stable companies that have been in the business for a long time. There are many new insurers and new schemes launched by them. Since they are new, they focus a lot on marketing. This may incentivise banks to push their products. There have been cases where the new insurance company closed its operations or transferred its assets to another stable insurance company. This leaves many customers in limbo, not to mention a headache and numbing paperwork with the insurance company in question. The premium may be higher with established insurance companies but that is the price you pay for stability.

Illustration: Uttam Ghosh/Rediff.com

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