[banking] bancassurance

1/26/2014 [Banking] Bancassurance: Compulsory Broker Model, IRDA vs Banks, issue, benefits, challanges, insurance penetration, Financial inclusion & Nachi

http://mrunal.org/2014/01/banking-bancassurance-compulsory-broker-model-irda-vs-banks-issue-benefits-challanges-insurance-penetration-financial-inclu 1/7

[Banking] Bancassurance: Compulsory Broker Model, IRDA vs Banks, issue, benefits, challanges,insurance penetration, Financial inclusion & Nachiket Committee

Prologue

Bancassurance

#1: Referral Model

#2: Corporate Agent model

#3: Broker Model

Benefits of Broker model?

Anti-Arguments: Broker Model

Nachiket on Insurance

Cross KYC

Reforms in NBFC bancassurance models

Allow NBFCs to take deposits

NBFCs as mutual funds agents

Banks as Mutual fund agents

Guidelines for Agents

Mock Questions

Prologue

As such Bancassurance=important for IBPS but not so much for UPSC, but topic has recently came in limelight because:

1. (Chindu+IRDA) vs Banks on broker model for selling insurance policies.2. Nachiket Committees recommendations: insurance/investment service to all poors by 1/1/2016

Bancassurance

Bancassurance= Banks as Insurance Agents=Bank and an insurance company form a partnership so that the insurance companycan sell its products to the banks customers.Concept originated in France.Overall, Insurance companies 30% of the business comes from Bancassurance. (i.e. bank customers).There are three business models in Bancassurance.

Benefits

1. Insurance company can reach more customers using Banks marketing channel, without having to invest in more offices andmanpower. Bank Customer is more likely to buy insurance policy because of past faith. (than if insurance company asked ashopping mall/cinema owner to sell insurance policies to their customers.)

2. Even Regional rural banks and cooperative banks are allowed to sell insurance policies like this= most economic for insurancecompanies, because they dont have enough money/manpower to reach every rural area.

3. Bank earns additional income.4. Bank staff already proficient in processing such forms/applications.5. Banks already have e-banking, mobile banking, ATM etc. facilities=> easy to collect money from customers.6. Customer gets both banking and insurance services at one place= time and effort saved in visiting multiple offices.7. + financial inclusion (when banks business correspondence agent or bank staff itself is providing insurance services to rural/poor

customers.)

There are three business models of Bancassurance.

#1: Referral Model

Here, Bank will give office space to the insurance company in its branches.The insurance staff will sit in the bank branch and sell its products to bank customers.Bank staff doesnt participate in selling.Bank faces no risk. Insurance company pays fixed-fees for using the office space.Pro: Customer directly talks with insurance staff=less chance of bank staff misguiding/mis-selling policies to them.Con: In other two models, bank can make more commission.

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#2: Corporate Agent model

Here, Bank ties up with one life, one non-life and one health insurance company.

For example:

Insurance company Its corporate Agent (Bank) Bank type

SBI life insurance State Bank of India Public sector

Tata AIG General Insurance HSBC Private sector

Bajaj Allianz General Insurance Saraswat Cooperative Bank Regional rural bank

United India Insurance. Tirunelveli District Central cooperative bank Cooperative

Majority of banks follow this model.Bank sells policies of only one insurance company= customer is deprived of choice, even if other insurance companies areoffering better alternatives. (imagine walking into an Apple showroom- the salesman can only sell you apple phones, even if otherSamsung/LG/Micromax phone is more suitable to your requirement and budget.)Bank is not liable to customer.

#3: Broker Model

Bank sells policy of multiple insurance companies under one roof. (multiple life insurance companies, multiple general insurancecompanies, multiple health insurance companies.)Bank earns commission according to sales-agreement with individual company. Imagine running a shopping mall displays varietyof biscuit brands.

Timeline What happened

2000Government and RBI permitted banks to sell insurance policies. (either through corporate model or through referralmodel.)



2013budget

Chindu allowed Banks to act as insurance brokers. (so that insurance penetration can increase in rural areas= financialinclusion)

November2013

RBI permits Banks to use Broker model and starts drafting guidelines.

December2013

Chindu writes letter to public sector banks- in budget 2013, I had hinted that you should switch to Broker model. Butyou havenot yet implemented it yet. Anyways, adopt the insurance broker model by 15 Jan 2014!

Jan 2014Bank chiefs dont take Chindus advice seriously. None of them adopts the Broker model. They continue sellinginsurance under Corporate Agent Model.

Jan 2014Chindu feels disrespected and maybe he even informally complained to IRDA chief.IRDA Chief TS Vijayan makespress statement that IRDA will make it make it compulsory for banks to adopt Broker Model. (once RBI drafts finalguidelines.)

Benefits of Broker model?

1. Bank will offer more choices to Customer= less chance of mis-selling.2. insurance penetration will increase in rural areas, thanks to bank branches and their business correspondence agents.3. In past, some insurance companies couldnt tie up with big banks under corporate agent model. These insurance companies get

less sales, even if their products are better (Because big banks are selling other xyz single product.) The broker model will benefitthese insurance companies- to display their products on banks showroom.

Anti-Arguments: Broker Model

Banks and Financial experts have criticized the move of government + IRDA because:

#Bad impression to Foreign investors

1. Bank have already have signed MoUs/Agreements with specific foreign insurance companies promising well sell only yourproducts. (e.g. Bank of India with Japans Dai-ichi life insurance.)

2. Now, If IRDA/Chindu forces them to adopt Broker model, then foreign insurance companies will feel cheated. They may evendrag the banks to courts.

3. Chindus devil-may-care attitude= Potential foreign investors fear Indian economic policies are unpredictable = lessinvestment in future = current account deficit increases = rupee weakens = petrol expensive = more inflation.

#Staff skills

1. Bank Staff lacks the skills in broking multiple insurance products. (again- Apple showroom salesman only needs to mugup thefeature list of Apple phones and tell customer that Apply is best! But a smalltowns mobileshop salesman has to mugup featurelists for 3-4 dozen phones, and guide the customer in choosing the right phone!)

2. Therefore, Banks will have to hire separate staff to deal with insurance-brokering only. = operating cost increases. And NPAs arealready high because of pending infrastructure projects and environmental clearances. = systemic risk.

#Diseconomies of scale

Broker model= bank has to keep staff trained for selling multiple products. Theyve to keep literature, application forms ofmultiple companies. Keep separate finance/accounting records/softwares. Keep in touch with multiple executives in differentcompanies = diseconomies of scale (Compared to doing this with just one company.)

#BC already doing it

Banks are permitted to appoint Business Correspondents (BCs). This BC may even sell mutual fund products, pension products, andmicro-insurance products of third parties. Examples:

Syndicate Banks officially tied with Birla Sun life insurance. But its Business correspondents in rural areas sell TATA AIGinsurance policies as well.So Chindus aim/intention that people in rural areas should get multiple product choice = this is already being done by Businesscorrespondent agents. There is no need to force Banks to adopt to broker model.

# Consumers more aware:

With internet penetration, even customer himself go online and buy insurance product. So, there is no need to force bank to sellinsurance policies of multiple companies.Sites like policybazaar dot com even give daily ads dont buy insurance without comparing= consumer awareness isincreasing. They can decide for themselves, even if bank staff tries to sell them a not-so-good insurance product.

Nachiket on Insurance



MohanMr.Nachiket, your Committee was appointed by RBI. But this insurance topic is related to IRDA. So, What are youdoing here?

Nachiket

Official name of my Committee is Comprehensive Financial Services for Small Businesses and Low IncomeHouseholds.Therefore, Ive to make recommendations on all type of financial services: be it banking, loaning, investment ORinsurance.

Mohan Fair enough. Then tell me about your next ambitious but unrealistic goal.

Nachiket here it goes

All small businessmen and poor families will be given insurance/investment products for

1. insurance for humans: life insurance, health insurance, disability insurance2. insurance of livestock (Cows, buffaloes, poultries)3. insurance of crops/farming/agriculture4. Insurance against property damage.5. Protection against commodity price movement. (e.g. Negotiable warehouse receipts click me)

Deadline: by 1 January 2016

Mohan and how to do you plan to achieve it?

Nachi observe:

Cross KYC

At present RBI, IDRA, SEBI, PFRDA(NPS) have permitted Aadhar card as a proof of identity and address.But still Banks, Insurance company, mutual funds, NBFC- all carry their own separate KYC checks. = duplicity of effort. Villagesface inconvenience because theyve to get photos and xeroxes of documents every time for every new account.Nachiket suggests RBI to give explicit instructions about Cross-KYC to Banks, Insurance Companies, Asset-ManagementCompanies, Mutual funds, NBFC , Banks, and Non-Banking Financial Companies.All of them must be permitted to rely on KYC done by each other, instead of duplicating the effort every time you open a newaccount.

Reforms in NBFC bancassurance models

Like the banks, NBFCs also sell life and general insurance to their customer base. but there are limitation:

NBFCs Bancassurance IRDAs current guidelines Nachi

Referral model not permitted allow =>financial inclusion.

Corporate agent model permitted already permitted so nothing new to do here!

Broker model not permitted. permit, with some conditions.

Allow NBFCs to take deposits

At present there are two type of NBFC

Deposit taking.Non-deposit taking.

Mohan So whats problem?



Nachi

Even if NBFC sells insurance products still NBFC cannot accept premium money from customer.The customer will have to directly deposit the premium to the insurance company (LIC etc.)Its not a big deal for city folks. But in remote villages, people dont have access to netbanking, cheque dropboxetc.=problem.

Mohan Then whats your solution?

Nachi

Remove this classification of Deposit taking vs. non-deposit taking NBFC.Simply allow all NBFC to accept deposits/premiums on behalf of banks/insurance companies.Itll facilitate financial inclusion.Insurance companies will be able to reach even the farthest parts of India, with help of NBFC agents.

NBFCs as mutual funds agents

Nachi

at present NBFCs can sell/distribute mutual fund policies after RBIs permission. But RBI will grant permission ONLY if

1. the given NFC has minimum 100 crores of funds2. making profit for last three years3. minimum NPA

Mohan so?

Nachigiven these stringent conditions, most of the small-time NBFCs are disqualified from selling mutual fund policies to theircustomer-base.

Mohan then whats your solution?

NachiRBI should relax the eligibility critiera, so more NBFCs can apply. That way, people from remote areas can also invest inMutual funds, through their local NBFC agents.

Banks as Mutual fund agents

With RBIs permission, the Banks can also sell mutual fund policy and give investment advice to its customers.

Bankas___

Where does the commission come from?

Mutualfund agent

Bank will convince its customer to invest in xyz mutual fund policy. Customer fills up the application form, bankforwards it to the mutual fund company, and mutual fund company gives commission to Bank. = this is typicalsalesman / agent type model.

Investmentadvisor

Bank officials will give financial planning and investment advice to its individual customers.Consultancy/advice fees paid from customers account or sometimes it is given totally free of cost informally.Mutual fund company doesnt pay anything to bank (atleast officially!).

But as you can see, there is conflict of interest. IF the bank is simultaneously acting a mutual fund agent + investmentadvisor=problem. Because bank staff will only advice you to invest money in the mutual funds where bank earns commission=misguidance, mis-selling, fake promises.

Nachiket has given many recommendations for consumer protection in such cases. But well see that in a separate article. But lets geta brief overview here:

Guidelines for Agents

1. RBI should publish a guideline for appointment of agents including National Banks, Regional Banks, and NBFCs. (no matterwhether they sell insurance or mutual funds policies.)

2. All Agents must be required submit some security deposit. Minimum Rs.5 lakh. Amount can be increased depending on thenumber of customers and volume of transactions

3. Biometric authentication of customers to prevent frauds.4. Agent must have trained staff to explain the risks and benefits of various financial products to customers.5. Agent must not design the salary/bonus package in such way that staff is motivated to do mis-selling/fake-promises to reach the

sales target.6. Agent must set up an internal grievance redressal mechanism, must publish give contact number/helpline for customers

complaints.7. All customer grievances should be solved within a defined time frame.8. Other recommendations related to consumer protection discussed in a separate article.

Mock Questions

Q1. Who among the following can to sell insurance policies in India?

1. Scheduled commercial banks2. Regional Rural Banks3. District cooperative banks



4. NBFC

Choice

a. Only 1 and 4b. Only 2 and 3c. Only 1, 2 and 4d. All of them.

Q2. Recently, Finance Ministry issued a circular asking the public sector banks to adopt Broker model for sellinginsurance products. This move will:

1. increase insurance penetration in rural areas2. Reduce mis-selling of insurance products.3. Improve profit levels of Public sector banks.

Answer choices

a. Only 1 and 2b. Only 2 and 3c. Only 1 and 3d. All of them.

Q3. Recently, Finance Ministry and IRDA have asked the Banks to adopt Broker model of Bancassurance. But the bankshave not yet adopted this model because

1. Broker model doesnt allow them to sell life insurance, non-life insurance and health insurance simultaneously.2. RBI does not permit Broker model-that sector is completely reserved for NBFC entities.3. Bank unions have demanded additional overtime-payments to work under this system.

Answer choices

a. Only 1 and 2b. Only 2 and 3c. Only 1 and 3d. None of them.

Q4. Which of the following is / are correct about Bancassurance?

a. If a bank provides bancassurance services to a farmer, poor or marginalized group, it qualifes under Priority sector lendingtargets.

b. If a customer doesnt make timely payments for Bancassurance services, bank is entitled to impose penalties under SARFAESIAct.

c. Both A and Bd. Neither A nor B

Descriptive

1. The compulsory broker model for bancassurance, will improve Insurance Penetration in Rural India. Comment. (5m | 100words)

2. Despite the nationalization of insurance companies decades ago, the insurance penetration in rural areas has been far fromsatisfactory. Examine causes and suggest remedies. (10m | 200 words)

3. Write a note on the initiatives taken by Government of India to improve insurance penetration in rural India. (10m | 200 words)

Interview

1. On the issue of Broker model of Bancassurance, bank chiefs have said unofficially that IRDA and Finance ministry shouldnt tryto force their economic views upon others, this is akin to the erstwhile license-quota-inspector raj. Do you agree? Yes/No andWhy?

2. Nachiket Mor has suggested removal of various restrictions on NBFCs, to allow them to sell insurance-mutual funds in rural Indiamore easily. Of course his thought process is focused on financial inclusion. But dont you think this sudden exposure of freemarket forces in Rural India may lead to financial exploitation of villagers rather than inclusion? yes/no and how?

3. Suppose, NBFCs are allowed to freely sell insurance/mutual fund policies of private companies in Rural India- but what if oneday stock market crashes and the villagers investment is lost! Dont you think Government should setup a separate organizationor department to sell policies in rural area? yes/no and why?

MCQ Hints

1. all2. FinMins official letter to PSB mentions statement 1 and 2. Third statement is wrong (or debatable on how you drag the logic of

increase in profit vs increase in operational costs.)3. None.



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4. Bancassurance is outside the purview of PSL and SARFAESI.

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