Bank customers now have the option to buy life and non-life insurance products from banks in a process that would be transparent and not motivated by the commission. By tying up with banks, insurance companies can save on distribution costs and cut their overall expenses.
The Insurance Regulatory and Development Authority (IRDA) have recommended that banks be allowed to have a tie-up with any two insurers: Two in life insurance sector, two in the non-life insurance sector excluding health and two in the health insurance sector. The bank staff would be fully trained in handling insurance products to ensure transparency and full disclosure of features of the product. Any mis-selling of insurance products will be strictly dealt and the banking ombudsmen will accept complaints from policyholders in case the bank or its staff is found mis-selling the product.
The regulator has asked for comments from all stakeholders and if the proposals are implemented, it will help insurers increase penetration. Public and private sector banks together have a network of over 80,000 branches 14,000 metro, 16,000 urban, 18,000 semi-urban and 32,000 rural branches and they can see value in the insurance business due to complementarity of products, and can generate fee income from the distribution of insurance products.
Though the number of savings bank accounts in the country is around 310 million, given the number of multiple accounts, the total number of individuals having bank accounts would be around 200 million and many account holders have long relationship with their banks. Bancassurance commenced in India in 2000, when the government issued notification under Banking Regulation Act that allowed banks to do insurance distribution.
As insurance is mostly sold in India as a push product, the role of distributors cannot be undermined. But after a series of new norms by the regulator, the commission earned by distributors has come down drastically. Moreover, insurers are also going slow on branch expansion, especially in smaller towns. Analysts say the Bancassurance model will not only be cost effective but will also be beneficial to customers as it will be more transparent.
Analysts also say Bancassurance can play an important role in reaching out to rural areas where a vast population remains outside the reach of insurance and help mobilize non-volatile source of funds over a long period of time. 82% of rural households have no insurance cover. An IRDA report makes a note that rural areas have to be given high priority by insurers for increasing the penetration of services.
Banks selling insurance products will not be eligible for any compensation other than the commission payable for distribution of insurance. Banks will also not be permitted to receive any other payment directly or through affiliates, or other revenues for any activity or facility including rent and advertising.