Representative image of an insurance policy document.
Credit: iStock Photo
Recently, speaking at the SBI Banking and Economic Conclave, Finance Minister Nirmala Sitharaman acknowledged the role of banks in expanding the penetration of insurance in India but raised concerns over the mis-selling of insurance products. She emphasised that banks should focus more on their core banking activities and not burden their customers with “insurances that they don’t require”. She further added that banks must prioritise transparency, ethical practices, and clear communication strategies to build public trust.
A day later, at the same enclave, Insurance Regulatory and Development Authority of India (IRDAI) Chairman Debasish Panda echoed similar concerns, stating, “The banca channel is a very useful channel. But of late, a lot of ills have crept into the system. We all need to sit together, thrash them out, and restore that confidence.” Both the finance minister and the IRDAI chairman were referring to flaws in the bancassurance model—where banks distribute insurance products in partnership with insurance companies.
A few weeks earlier, RBI Deputy Governor Swaminathan, addressing a conference of directors of private sector banks, noted that while attrition rates in private banks had improved over the last financial year, they remained high at an average of 25%. He pointed out that “attrition numbers are not merely statistics; they are indicators of deeper challenges in the banks’ approach to employee engagement and retention.”
What is the connection between mis-selling and attrition rates, one might ask. The connection becomes clear when considering the statements of the finance minister, RBI governor, and the RBI deputy governor together—there are flaws in the Bancassurance model.
The bancassurance model was introduced in 2000 after the government permitted banks to undertake insurance as a permissible form of business under Section 6 of the Banking Regulation Act, 1949. Banks leveraged their vast branch networks and workforce to distribute insurance products, generating easy fee-based income with minimal risk—unlike lending, which involves credit assessments, recovery efforts, and provisioning for bad loans. Banks were quick to see the potential of this model, and large banks even set up their own insurance subsidiaries to maximise profits. Imagine the business that a bank having a network of 22,000 branches can generate through its insurance subsidiary.
This model benefits both banks and insurers—for insurance companies, by increasing premium collections at a lower cost and avoiding reliance on traditional insurance agents; for banks, there is no risk in selling insurance, unlike loans. While the objective of this model was to increase insurance penetration in the country, unethical practices have crept in.
There are instances where customers are nudged to buy insurance policies with huge premiums for loans sanctioned to them. There are also reports of branch heads harassing junior-level staff and using abusive language for not achieving targets.
Many young bankers at the junior level in private sector banks are disappointed with the system and state that they are given unrealistic targets to sell life insurance policies. Unable to handle the pressure, employees at the junior level quit their jobs, leading to high attrition levels. The attrition rate is as high as 40% in some banks. This can become counterproductive as operational costs of banks increase since they have to spend more on recruitment and training of new employees.
Mis-selling will also result in customer complaints and litigation leading to a loss in reputation for banks. A few others who stay back resort to unethical practices to achieve the targets, get incentives, go on foreign jaunts, and move on to new pastures at higher levels. In this unholy alliance, customers get a short shrift and hold on to policies that they don’t need. However, the government has been mulling regulations of late to protect the interests of policyholders. The recent changes in surrender value guidelines on traditional plans giving a higher refund to policyholders are one such move to benefit policyholders. The Insurance Regulatory and Development Authority of India (IRDAI), concerned over the dominance of a single distribution channel, is likely to introduce regulations to limit the dependence of life insurance companies on their parent banks for life insurance business.
If insider trading, where an insider who is privy to price-sensitive information is banned from trading in stocks of his company, is banned, employees who leverage information about customers account details should also be banned from selling insurance to them. The government should not kick the can down the road on fixing the holes in the bancassurance model any longer. Regulating bancassurance will be a challenge as it involves two big sectors. If insurance penetration is a concern, banks should be permitted to sell only term plans to their customers & prohibited from selling other high-commission-carrying traditional plans. There will be fewer complaints of mis-selling. And lower attrition levels.
(The writer, a CFA and former banker, currently teaches at Manipal Academy of Higher Education, Bengaluru)