SubscriberWrites: Why banks should focus even more on insurance and not less

Representational Image

Thank you dear subscribers, we are overwhelmed with your response.

Your Turn is a unique section from ThePrint featuring points of view from its subscribers. If you are a subscriber, have a point of view, please send it to us. If not, do subscribe here: https://theprint.in/subscribe/

This might appear to be an exercise in defence of the indefensible, given the recent flutter pertaining to mis-selling of insurance products by banks. The week that went by witnessed the Finance Minister admonishing banks to rein in mis-selling of insurance and to focus on their core banking activities. This was followed by a statement by the Insurance Regulatory Development Authority of India (IRDAI) chief highlighting that a lot of ills have crept into the system. Both these messages are being forwarded by bank employees, across the country – across banks, fervently hoping for a reduction in pressure on sale of insurance products.

Anecdotal evidence points to many customers echoing that they end up buying the policy because of their relationship with the bank/agent, succumbing to persuasive efforts and emotions ranging from sympathy to empathy to dependence and in some extreme cases – threats. However, data on customer complaints received at banks does not seem to capture these sentiments effectively. The total number of complaints received by banks pertaining to mis-selling of insurance in the previous financial year as reported by them is but a miniscule fraction of the total number of complaints received by these banks pertaining to charges. Also, while banks are being repeatedly fined by RBI on various issues, we are yet to witness any penalty or structure by RBI on any bank – big or small – on the issue of mis-selling. Now, that’s an issue that requires separate scrutiny.

The manner in which insurance is being sold being the topic of contention, it would be prudent to address the root cause rather than tinker with the manifestation. This brings up the elephant in the room – the commission structure. While the two products are not strictly comparable, this illustration will provide perspective. For an equity mutual fund that is distributed by a bank the commission earned is below 2% on a trail basis. Which means that the bank could earn upto Rs.2000 every year on a mutual fund sale of Rs.1,00,000 (one lakh) until it is redeemed. For sale of an insurance policy of premium of a similar amount the bank could earn even upto Rs.70,000 in the first year depending on the product and around Rs.5000 in subsequent years. Obviously, this adds to cost for the customer and eats into their returns – all the while being a mouthwatering incentive for banks. At the risk of providing a simplistic solution, it would be worthwhile to introduce two significant changes to the commission structure. It is imperative that commissions are slashed and that emphasis be shifted from upfront commissions to trail commission spread over the life of the policy. This will ensure that the interests of the bank and the customer are intertwined and the fascination with instant gratification through sale of insurance will subside.

Insurance for all by 2047 is a goal being pursued by IRDAI and the document states that the focus of IRDAI is to strengthen the three pillars of the entire eco system viz. insurance customers (policyholders), insurance providers (insurers) and insurance distributors (intermediaries) by making available right products to right customers; creating robust grievance redressal mechanism;  facilitating ease of doing business in the insurance sector; ensuring the regulatory architecture is aligned with the market dynamics;  boosting innovation, competition and distribution efficiencies while mainstreaming technology and moving towards principle based regulatory regime.

Towards achievement of these goals the banking channel could be the most dependable partner on account of multiple factors. Nearly 80% of the adults in our country have bank accounts. The wide reach of bank branches provides a gateway for these individuals to be meaningfully advised and adequately insured. Know Your Customer details coupled with transaction particulars provide banks with important data points to ascertain suitability of insurance products for customers. Usage of Artificial Intelligence by banks to identify right products and also red flag instances of mismatch of product/ premium can ensure right selling. Call centres of banks could intermediate between insurance companies and bank customers for effective grievance redressal. Digital infrastructure of banks which have largely been used only for their core products could be expanded to include insurance products thereby enhancing ease of doing business and reducing cost of policy issuance and servicing. Innovative models like policy as a service could emerge where banks partner all insurance companies thereby providing a wider choice for customers.

Given that insurance penetration in our country is low it should be the professional social responsibility of banks to ensure that customers are adequately insured. Rationalising the commission/ incentive structure is the solution which will meaningfully alter the manner of sale. Let’s not make the mistake of throwing the baby out with the bath water.

These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint