Shopping at a supermart is very convenient as you get everything you need under the same roof without having to hop to different stores for different items. Nowadays, banks have also become some sort of a supermart selling a host of financial products under tie-ups with different financial corporates. So, anyone with spare cash can now walk into a bank branch and come out with a complete investment portfolio, including fixed deposits, mutual funds, PPF deposits, life insurance, and general insurance. Talking about insurance, as per the Government ordinance issued in January 2015, the Reserve Bank of India allowed banks to act as insurance brokers as per the norms outlined by the Insurance Regulatory and Development Authority of India (IRDAI). So now banks can act as brokers selling products of different life and non-life insurers.
Earlier to this ordinance, banks were allowed to act as corporate agents selling products of one life insurance company and one non-life insurance company as per Section (6)(1)(o) of the Banking Regulations Act, 1949. But with the current regulation, banks can now extend their product range by including products of multiple life and non-life insurers.
Why the ordinance?
As seen by the chart, the bancassurance channel showed growth in sourcing insurance business for private players. In fact, with over 80 banks having about 1.2 lakhs branches, insurance penetration can be increased considerably if banks are allowed to sell products of multiple insurers. With a penetration level of 3.3% for life insurance in financial year 2015, an increase in the figure is the primary reason for the RBI to allow banks to act as brokers.
Can banks be trusted?
Some may argue that banks can be trusted since banks also generate revenue through the sale of insurance products while others may say that mis-selling will be a common problem. Let us take a look at the pros and cons of banks acting as brokers.
Reasons why banks can be trusted:
- Existing customer base – banks are at an advantage by having an existing customer base to which they can sell the products. That was the primary reason why banks entered into an arrangement with insurance companies. So, with the details of every account holder, banks are in the position to sell the products to their existing customers without having to look for potential buyers.
- Need-based selling – banks have the accounts of every customer and they can ascertain the needs of customers based on their loan and credit history. So they can offer need-based expertise while selling insurance.
- Physical presence and inter-personal trust – with over 1.2 lakh branches, banks have presence everywhere, even in remote areas. Moreover, employees generally form a good rapport with long-standing customers and provide useful tips on buying insurance.
Reasons why banks cannot be trusted:
- Mis-selling – the flip side to banks acting as intermediaries is that with a host of other products to sell, banks may not take a particularly keen interest in selling insurance products. Moreover, even if they do sell, they may not take the need-based approach instead of selling the plan which generates maximum revenue. This may result in mis-selling which is a major concern in the insurance sector.
- Post- sales service – unlike an agent who collects your renewal premium from your doorstep, banks will not extend this facility and the policyholder will have to take care of the renewal premiums and other facets of the policy generally delegated to agents.
Though mis-selling is common in case of agents too, it is the sole responsibility of the customer to understand the complete terms and conditions including the benefit structure of the plan in which they invest. Banks may solicit expert financial advice, yet, that should not be blindly followed. Research is the key to a sound portfolio be it through banks or through other channels. Trusting banks as a broker is helpful because of the range of products available to choose from so that the best plan is chosen form the lot. But to get a comprehensive understanding of all the plans, it is better to refer to online insurance comparison portals, such as policybazaar. In the online medium, you get an unbiased view on all the products offered by 52 insurers in India. Once you have 3600 view, you will be able to make a sound informed decision.