Lack of alternatives leads a bank to mis-sell. If you believe this to be true, mis-selling of insurance products by banks may substantially come down now. Insurance Regulatory and Development Authority (IRDA) had allowed banks to become insurance brokers last month. The matter was subject to the approval of RBI. In the past, the central bank was apprehensive about banks becoming insurance brokers as it was of the view that becoming insurance broker would expose them to additional risks. Possibility of conflict of interest (e.g. insurance company and the bank of a same promoter group) was another factor that RBI considered a negative for banks assuming a role of insurance distributors.

On this background RBI had expressed its reservations to liberal nature of guidelines proposed by IRDA earlier. After having received strong resistance from RBI, IRDA re-initiated a dialogue with various stakeholders such as banks, insurers and the government to fine-tune guidelines. The finance ministry somewhat played the role of a mediator and asked IRDA to review proposed guidelines. Seemingly, RBI is now convinced and satisfied with the modifications in the guidelines. It has given its nod to banks becoming insurance distributers. However, RBI held on to its stance to grant permission on selective basis. As a consequence, banks would now only sell standard insurance products issued by various insurance companies through their branches. Insurance products sold through banks would be standardised for features and commission structure.

As per IRDA (licensing of Banks as Insurance Brokers) Regulations, 2013; not more than 50% of the premium shall be emanated from any single client. Furthermore, there is an upper limit of 25% on selling insurance of an insurance company having a same promoter group such as that of the bank. Instead of directly placing any capital requirement, the guidelines require banks to maintain a fixed deposit of Rs 50 lakh with any schedule bank. Moreover, separate books of accounts are to be maintained by the bank now. This might have addressed concerns of RBI.

Expected Impact:

Life insurance penetration in India is very low at present and the decision of allowing banks to sell multiple insurance products through branches would help improve the reach of insurance. The banks have a huge customer database and have already established relationships with them. Moreover, now that banks have multiple choices to select from, miss-selling by banks is also expected to reduce.

PersonalFN view:

In view of PersonalFN, the move of allowing banks to sell products of various insurers might help improve the penetration of insurance in India. However, PersonalFN believes that, creating awareness is of utmost importance. On the other hand customers should also understand that the insurance should be bought to cover risks and not to earn returns. Unless people adopt customised approach and understand their own insurance requirements before buying insurance; huge network of bank branches may not ensure any substantive success. PersonalFN is of the view that, the primary reason for low penetration of insurance in India has not been lack of distribution network but lack of interest to promote products that suit customer requirements. Assumption that products with standardised features would curb mis-selling appears slightly unconvincing. The bank may still end up selling one of the best products in a particular category but unless that satisfies the insurance requirements of the customer; it wouldn't serve its purpose. PersonalFN believes buying term insurance optimises the benefits.

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