In Bankers We Trust

The debate over whether banks should sell insurance products of many companies or whether they should confine themselves to one firm as they have done so far seems stuck for the moment.

Consider this: The Insurance Regulatory and Development Authority (Irda) has already come up with a draft policy outlining that banks can partner with two life insurance companies, two general insurance companies and one health insurance company. The draft policy states banks should stop acting as agents of one insurance company if they want to sell policies of multiple companies, and apply to the Irda for a broking licence. It also lays down the commission structure for the products, pegging it at a maximum of 2.5 per cent of the premium collected. But the finance ministry is yet to give its approval.

The issue that is perhaps holding up matters is whether banks have the skill to sell policies of different companies and manage a varied product portfolio. It is possible to do so, according to Amarnath Ananthanarayanan, chief executive officer of Bharti Axa General Insurance. “If you look at South-east Asia, this model is very popular,” he says. According to him, the commission structures are also the lowest in bancassurance channels. In countries such as Thailand, the regulations do not allow the policies of any one company to exceed one third of the total new business income sold through a bank. This rule is applied even in the case of banks that have a majority stake in an insurance company.

But sources say that the Reserve Bank of India (RBI) will ensure that banks do not lose sight of their primary activity — banking — while letting them decide the level of commitment or targets while selling multiple insurance products.

With the recent changes in the regulations, bancasurrance has emerged as an efficient and a key channel for selling insurance products in the country due to an established infrastructure, large branch network and existing customer base. SBI Life, for instance, has the largest banking distribution channel for its policies with more than 16,000 branches of SBI, its parent. In India, there are more than 100,000 bank branches across the country.

According to a report by Towers Watson, a consultancy firm, the share of bancassurance in the total new business premium collected by private players in the life insurance industry saw an increase from 31 per cent in 2010-11 to about 35 per cent in FY2011-12. Its share in the total new business premium collected by the private players in the non-life insurance industry also witnessed an increase from about 1 per cent in FY2007-08 to 9 per cent in FY2010-11. However, the share of bancassurance has witnessed a marginally negative growth for the public sector insurers over the years.

 “Traditionally, the “agency channel” has been the dominant channel with the highest market share, but bancassurance is growing at a faster pace,” says Vivek Jalan, director of risk consulting at Towers Watson India.

In the life insurance industry, in 2011-12, about 20 per cent of the policies aggregating to 35 per cent of the total new business premium of private insurers were sourced through the bancassurance channel. At the industry level, about 5 per cent of the policies aggregating close to 11 per cent of the total new business premium of the industry were received through the bancassurance channel. “This was pulled down primarily by LIC which continues to follow an agency-dominated distribution model,” says Jalan of Towers Watson.

In the non-life insurance industry, about 7 per cent of the policies accounting for 6 per cent of their total new business premium were sold through bancassurance in 2010-11. For private insurers, bancassurance accounted for 9 per cent of policies as well as new premiums in 2010-11. In 2011-12, the weighted new business premium collected by the life insurance industry was close to Rs 677.7 billion while that by the non-life insurance industry was Rs 583.4 billion.

“Selling more products of the same principal needs to be studied as well as shareholder banks selling policies of other players,” says Ashvin Parekh, national leader of insurance, and partner at Ernst & Young. He says there must be an incentive to sell policies and the issue is beyond whether a bank should sell insurance or not.

Last year, Irda clamped down on all unit-linked products (Ulips) that were charging high commissions. And companies were forced to launch a new set of products after October 2010. They were at the mercy of banks, which had to decide if they wanted to sell multiple insurance products or not. Insurance firms thus should not be dependent on banks to push all their products and should look for other channels. Bajaj Allianz, which uses a multi-distribution channel, has been able to wipe out its accumulated losses.

Companies such as ICICI Prudential, HDFC Life and SBI Life, which follow the bancassurance model, have at least 65 per cent of the market share. They are subsidiaries of their banks, which are against selling products other than their own. “Leave the targets of selling insurance to the banker because the banker knows his requirement,” says Parekh of E&Y.

vishal(dot)krishna(at)abp(dot)in

(This story was published in Businessworld Issue Dated 17-12-2012)