The Insurance Regulatory and Development Authority of India (IRDAI) isn’t satisfied with the progress of bancassurance, which became operational in India in 2000. IRDAI observes that despite the vast network of branches, banks, as corporate agents, contributed 5.93 per cent of non-life premium and 17.44 per cent of new business premium for life insurance in FY23.

In order to improve bancassurance performance, IRDAI in October 2023 constituted a 16-member Taskforce (TF) headed by J Meena Kumari, Executive Director (Life), IRDAI. The members are from IRDAI, and select commercial banks and insurance companies, both public and private.

The TF will study the effectiveness of existing bancassurance model and examine the international best practices with focus on safeguarding policyholders’ interests by bridling mis-selling by bankers.

The original rationale for bancassurance was two-fold: (a) to leverage bank branches as delivery points for insurance products and (b) to accelerate diversification of banking business to non-banking business like insurance which would help banks improve their “Commission, Exchange and Brokerage” or “fee income”, and ultimately profitability.

Have these objectives been achieved?

Insurance Coverage

The two objective indicators of insurance coverage are: (a) insurance penetration, i.e., premium as percentage of gross domestic product and (b) insurance density, i.e., premium per capita.

In terms of (a), India moved up to 4.2 per cent — 3.2 per cent (Life) and 1 per cent (Non-life) — in 2021-22 from 2.71 per cent — 2.15 per cent (Life) and 0.56 per cent (Non-life) — in 2001-02.

In terms of (b), India graduated to $91 – $69 (Life) and $22 (Non-life) — in 2021-22 from $11.5 – $9.1 (Life) and $2.4 (Non-life) — in 2001-02 (Chart 1). By both the measures, India compares poorly, globally. However, these values reflect existence of considerable potential in both life and non-life spaces for the insurance industry as well as bancassurers.

Based on balance sheet data, our computations (public sector and private sector banks) revealed that during 2010-11 to 2022-23, Average Bancassurance Income (ABI) per bank grew exponentially at an estimated trend rate of nearly 17 per cent, whereas its contribution to the Average Fee Income (AFI) per bank increased from 5.0 per cent to 8.7 per cent after touching a high of nearly 10 per cent in 2020-21 (Chart 2).

Also noteworthy are the following: (a) banks earned much more revenue from selling life products than non-life products; (b) the new private banks generated more bancassurance income than their public counterparts; and (c) bancassurance income, individual bank-wise, was highly skewed, implying lack of competition among them.

Policy Options

The key to fast-tracking bancassurance is ‘comprehensive’ Customer Relationship Management buttressed by skilled staff and modern technology. The Banks’ precious database needs to be increasingly harnessed to target customers, sell them appropriate products, service their queries or needs, and redress their grievances.

In other words, banks must maintain long-term relationships with the bancassurance customers. Face-to-face interaction with the target customers is imperative because bancassurance products are more complex than banking products. Technology will be a catalyst in these efforts.

Insurance products are genetically ‘push’ products, and the markets are fiercely competitive. Therefore, banks need to generate the required marketing thrust by establishing a dedicated army of staff with relevant qualifications and special skillsets, bolstered by bank-specific training, instead of ‘routine’ staff postings.

Remuneration must be a judicious mix of salary and performance-linked incentives.

There is innate, howsoever denied, resistance among the bank staff as to why should they sell non-bank products in preference to banking products, in which they are adept. The mergers of Wells Fargo & Co. with Wachovia Securities and Bank of America with Merrill Lynch & Co., both in 2008, exemplify our argument.

While the former merger was effective in instituting cross-selling owing to similarity in their ‘cultures’, in the latter case, Bank of America lost Merrill Lynch brokers because the former ‘insisted’ that the latter sold bank products to their investment clients. Therefore, mindset changes are necessary through appropriate incentives and motivational training so as to iron out incompatibilities between bank and non-bank cultures.

Agents’ role

Insurance businesses are generally agent-driven and when agents are given performance-linked incentives, mis-selling becomes a common consequence. Mis-selling is not just Indian; it is a global phenomenon, and attributing it to higher commission alone would be strategically wrong.

One of the most significant, empirically observed factors is pressure from CXOs on the sales force to achieve targets (e.g., Wells Fargo ‘misconduct’ of 2016 in pursuance of their “Good to Gr8” strategy). Moreover, in the Indian context, routinely posting unskilled personnel as sales agents and their lack of comprehensive product knowledge, especially while simultaneously managing both banking and non-banking businesses; no customer discipline on agents; financial innumeracy about bancassurance products; and poor grievance redressal systems instigate mis-selling. Therefore, all-out efforts must be made to ameliorate these, instead of annulling incentives.

Increased digitalisation, along with the avalanche of techno-financial innovations, will, slowly but surely, open new vistas. Some of the potential areas for bancassurers include health insurance, travel insurance, credit insurance, insurance against cybercrimes, and insurance of brokers and other capital market intermediaries.

However, sans specialized and dedicated workforce, appropriate incentive structure and quantum, and proper market research bancassurance cannot make much headway.

Simultaneously, banks need durable, supportive regulations and policy regime not only for promoting innovation and level-playing fields but also for leashing possible contagion risk. Finally, banks are vulnerable to image risk in case their bancassurance operations fail.

The writer is a former senior economist, SBI. Views expressed are personal.