Banks, insurance cos lock horns over bancassurance tie-ups

Mumbai, Nov 20 | Updated: Nov 21 2005, 05:41am hrs
In less than three years after the launch of bancassurance, there is friction between banks and insurers. Banks feel they have got a raw deal while selling policies of insurance firms. Insurance companies, which had adopted a strategy of forging tie-ups with banks for strengthening their distribution network through the latter's huge geographical presence across the country, are now facing the heat as the banks feel they have not been benefited in comparison with the insurance companies.

According to sources, the banking industry is considering approaching the Reserve Bank of India (RBI) to allow them multiple tie-ups.

The bone for contention has to do with the policy which mandates that any bank can only sell products of only one non-life and life insurance entity. Hence, in effect, banks can only tie-up with one life and non-life company. On the contrary, as the policy mandates, an insurance company can tie up with any number of banks it wishes too.

As P Subba Rao, executive director, Punjab & Sind Bank (PSB) points out, "In the present arrangement of bancassurance, the benefits are not evenly spread. The banks are acting as corporate agents of the insurance companies. The cost-benefit ratio of such tie-ups clearly shows that greater benefits are accruing to the insurance companies. Furthermore, we are handicapped by the policy that we cannot tie-up with multiple insurers."

The bankers feel that the insurance companies are gaining without paying their dues or incurring negligible overhead costs for enhancing the insurance company's distribution network. "The customer acquisition cost is lower as they get readymade clients. On the other hand, if the customer is not serviced well by the insurance company the image of the bank gets hampered," Mr Rao added.

The banks have also argued that the commission given to them is very low and the insurance companies should increase that component.

The commission from such sale is reflected in a bank's balance sheet under the fee-based income head. "As a result of stiff competition, there has been tremendous pressure on the banks' profitability and fee-based income is also becoming competitive. The revenue-sharing formula of the bancassurance model should be such that it would augment the bank's fee-based income," said Suresh Mehta, GM, retail, of state-owned Bank of Baroda.