Recent remarks by the finance minister and the Irdai chairman on the “mis-selling” of insurance products via banks are likely to push life insurers to reassess commission structures, broaden distribution channels and reduce dependence on bancassurance, which currently drives over half of the industry’s business.
Earlier this week, Debasish Panda, chairman of the Insurance Regulatory and Development Authority of India (Irdai), urged banks to focus on their “core job”, rather than prioritising insurance sales, which he described as “incidental” to banking. “Banca is a very useful channel. But of late, a lot of ills have crept into the system,” Panda noted, highlighting the presence of “mis-selling” through this channel.
His comments followed a similar message from finance minister Nirmala Sitharaman, who advised bankers to avoid mis-selling insurance policies, pointing out that it can indirectly raise borrowing costs for bank customers.
“The recent remarks and developments will nudge the industry to explore similar efficiency and cost-effective avenues,” said Kailash Mittal, partner and head of insurance and actuarial at KPMG in India. He added that insurers will likely consider two options: investing in higher capex models like agency and digital channels, or focus on broker-driven distribution and variable cost models to recalibrate their distribution strategies.
However, making such a shift will not be easy, according to Sumit Bohra, president of the Insurance Brokers Association of India (IBAI). He pointed out that bancassurance contributes 55% of the life insurance industry’s premium and 6% of the general insurance premium. “You can’t suddenly take a hit on a business contributing 55% of the ₹3.5-lakh-crore premium life insurance industry,” he said.
Bohra said the recent comments followed instances of mis-selling life insurance policies to elderly customers, as well as declining persistency ratios for policies sold through banks. Persistency ratios, which track the percentage of policyholders continuing their policies, often fall when policies are mis-sold and do not meet customers’ expectations, leading to early policy lapses.
Shares of SBI Life and HDFC Life shed 2-4% a day after Sitharaman’s remarks, as over 60% of their premiums come through their bank partners, State Bank of India and HDFC Bank, respectively. In contrast, ICICI Life derives only 29% of its business from bancassurance. Life Insurance Corporation, the country’s largest insurer, gets just 4% of its new business premiums from the bank channel.
Debashish Banerjee, partner and insurance sector leader at Deloitte India, noted that life insurers are already expanding other channels, including agency, brokers and direct distribution. “The last three years’ CAGR for direct channels, for instance, is roughly 20% or more across major private players,” he said, adding that life insurance requires a personal touch, which also makes the broker channel a key focus.
Industry experts also suggest life insurers may adjust commission structures for bancassurance to discourage mis-selling of high-commission, guaranteed investment products, often sold by banks over traditional term policies.
Casparus JH Kromhout, managing director and CEO of Shriram Life Insurance, highlighted that bancassurance remains one of the most cost-effective channels as it combines both banking and insurance services. He noted that insurers can also work with corporate agents to sell policies to existing customers.
Shriram Life Insurance, focusing on low- and middle-income segments, currently obtains over 50% of its individual new premiums from corporate agency channels, while its direct channel accounts for nearly 30%.