THE life insurance industry has picked up pace since banks started bancassurance a decade ago.

The bancassurance distribution channel has been a success given the lucrative market, hefty commission structure, an under-insured population and banking customers’ little awareness about insurance products.

All the ingredients were just ripe for insurance companies to invest and increase the country’s per capita insurance.

The guidelines largely favour a tilt towards the referral-based model as the incentive for banks to directly invest in infrastructure and training people is almost gone

The bancassurance model also prospered because of the ease of customer access and the reliability of the banking sector. This channel now roughly contributes around 40pc of first-year premiums of the life insurance industry.

The channel also enabled small insurance companies to obtain a greater foothold in the life insurance market. This also induced the state-run giant to ultimately enter the segment.

After a hiatus of about five years, the SECP introduced new bancassurance guidelines this year. However, only time will tell whether these guidelines will address the structural issues plaguing insurance distribution at large or serve as a smidgeon at covering the obvious faults.

Looking on the positive side, the new guidelines attempt to tackle the issues of necessary customer documentation, including a vital one that some banks and insurance agents are very wary of using: an analysis document that customers really need.

Recycling of insurance policies has also been put under the scope and premature surrendered policies and lapsed policies have been barred from being sold as any other insurance policy. This is to put the insurance companies and the banks under check so as to prevent any premature cancellation or surrender.

These issues can, however, be debated if a customer wishes to switch his relationship from one bank to another. Why should a person be forced to continue the first insurance policy if he genuinely feels the need to buy another policy from a different bank because of a superior product?

The regulation has attempted to address key areas of mis-selling, and a broader definition has been included to keep an adequate check on the quality of sales being made. This was an absolute necessity and the earlier guidelines did not cover any such aspect to protect the consumer.

Meanwhile, the SECP has reduced the commission incentive for banks in both models: referral and direct. The commission for referrals has been reduced from 45pc to 40pc and for direct from 60pc to 50pc for the first year. The total commission earned by banks has also been capped.

While bancassurance distribution clearly required a mechanism of quality checks to protect the customers from slick salesmanship, the fundamental issues of disenfranchisement, accreditation of selling personnel, minimum standards of service and minimum fund allocation for customers have been left at the discretion of the insurance companies.

The reduction in banks’ commissions, coupled with some other measures, will affect the persistency, renewal and cancellation of policies. And these measures cannot guarantee that cancellations and miss-selling will be eliminated or reduced considerably, or that the banks will start owning the insurance products to the same degree as their core banking products.

While the adopted direction is the right one, the cut in commissions should have been linked with measureable goals in terms of new customer acquisitions (to increase insurance penetration), or the investments made in the infrastructure.

The guidelines largely favour a tilt towards the referral-based model as the incentive for banks to directly invest in infrastructure and training people is almost gone.

This is also unlikely to bode well for the customer, the insurance business, the distributors (banks) and the insurance companies at large. In fact, these guidelines may lead to a concentration of the business with a few large insurance companies

The direct sales model requires a deep-rooted investment and commitment from banks.

The bancassurance channel had opened a much-needed vent for competition in the insurance industry and also provided a channel for its growth, product innovation and customer facilitation. The referral model seemed necessary at the beginning as some banks may have included insurance products on their menu while avoiding any sizable investment.

And the referral model has done well; one of the largest banks has a single insurance partner and it has raked in billions in premiums.

However, the success of the referral model in terms of a single bank can be debated and this certainly should not be the basis for the SECP to formulate bancassurance guidelines.

The regulator should instead encourage a model that encourages wider competition, greater transparency and provides customers with greater options, while keeping in view the primary goal of 10pc insurance penetration.

The current SECP guidelines do not put a limitation on the adoption of models, i.e. any bank can have two, even three insurance companies on a referral. Or it can have a direct as well as a referral model in place with two different insurance companies.

A case in point is one bank that presently has three insurance partners on referral mode; they have been assigned different geographies to sell their products.

The direct sales model enabled the banks to provide multiple products from different insurance companies, and also required the banks to hire and train quality staff as these are long-term products and require long-term customer servicing and facilitation.

But with the new guidelines, soliciting life insurance on a direct sales model by banks has been compromised and they may no longer be interested in providing the best possible products. Instead, banks may be forced to provide the products of only one life insurance company, as their investment costs for the direct are now barely justifiable.

The writer is head of bancassurance at Habib Metropolitan Bank

Published in Dawn, Economic & Business, August 17th, 2015

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