Banks as a shop for insurance

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BANKS | DEEPAK YOHANNAN | INDIA | INSURANCE

(The views expressed in this column are the author's own and do not represent those of Reuters)

The concept of insurance plans being sold through banks is called 'bancassurance' and there is a lot of interest in this distribution channel from all the stakeholders - customers, banks, insurance companies and the regulator.

Bank as a distribution channel offers some very distinct advantage for the insurance companies, biggest being a large established network which can operate on a purely variable cost basis. The time and money required to establish something similar is exhaustive and expensive, almost bordering on the impossible.

So the obvious has happened – all big Indian banks have actually become stakeholders in some insurance company or the other.

From the bank's perspective, it opens up a new line of fee-based income which is so crucial for most in today's world.  An attractive fee-based product like insurance seems too tempting to stay away from.

There is a large amount of trust which the customers have on the banking system and hence the trust factor combined with convenience makes it a good option for them.

The regulator would, of course, want such a large distribution system to function in a way which is fair to all and avoid or minimise systemic risks.

Though out-weighed by the positives, there are some flip-sides too. Banks by the nature of their business know a lot about the customer which most others would not. This creates a conflict-of-interest scenario and can provide an undue advantage to the seller.

Also banks are increasingly trying to move most of their transactions online or through ATMs, and in fact there are dis-incentives for branch visits and cash transactions. As banks move towards automation and reduce interaction avenues, the familiarity with the banker would come down and so the chances of sale too.

Another key point, which is more by the way of regulation, is the fact that banks can sell plans of only one life, general and health insurance company each. So instead of getting the most suitable product, the customer might actually be sold a product which makes the maximum fee-based income for the bank.

Also because of this regulation, new insurance companies are finding it difficult to get a partner as most of the big banks are already tied up with some insurer or the other.

The Insurance Regulatory and Development Authority (IRDA) has attempted to fix this problem by some regulatory tweaks. The changes are yet to be approved and are under discussion.

Banks can operate as brokers whereby they can sell plans of any insurance company. While this is good for the consumer, it means the banker now needs to be trained on a large number of products from multiple insurers. We can safely assume that the "banker" would probably find this too difficult.

The other solution offered is by breaking the country into zones and allowing banks to get into tie-ups with different insurers in different zones. Though this doesn't offer any advantage to the consumer, insurance companies with fewer bank partners will find it easier to find one in some zone.

While it is best for the consumer if the banks take on the role of a broker, it remains to be seen if banks would take that path, as there is a considerable increase in responsibilities towards the consumer. Banks might take the more focussed and easier path of sticking to single tie-ups within their branches.

It reduces the training costs and helps drive more volume to the single insurer.

Bancassurance is a very sought after channel for any insurer and these steps will create an opening for insurers who find it difficult to find banks as partners. These are the days of the supermarkets, so why not banks as financial supermarkets!

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com