Bad Idea: Indian banks selling insurance

This is a bit of a rant and I am generalizing my experience to the entire system. But something tells me that I am not too far off.

The RBI briefly flirted with the idea of allowing Indian banks to sell insurance. But have you met your bank manager? Most bank employees, managers included, are aces at accounting and process. They can point out the exact color of the forms you need to fill out, how many people up and down the chain it needs to get signed by, documents required for taking out a loan, etc. But when it comes to having a grip on finance, economy or the markets, those are not the people you want to be taking advice from. However, most people can’t tell the difference between accounting and [finance, markets, economy] and look up to them for advice in those areas. Advice that bank employees are more than willing to give.

The escape hatch is built into the system. Most employees get transferred around. My dad, who used to work for a public sector bank, was transferred almost every 3-5 years. The concept of “roots in the community” doesn’t really apply. Add to this is the fact that most insurance commissions are front-loaded. And employees don’t get a commission for taking fixed deposits. Most people follow the advice that their bank manager gives them.

So imagine this scenario where you have scraped together some savings and you go to your bank to make a fixed deposit. The banker makes more money for himself if he convinces you to take out an insurance product instead. You are a farmer with only basic knowledge of personal finance. What are you likely to do?

The skewed incentives that this presents can only lead to disaster. Plus, there is proof that agent-sold insurance in general doesn’t actually benefit the consumer:

Prices of online term plans are much lower than that of agent-sold policies and the sum assured is significantly higher. An online term policy is as much as 50% cheaper than an offline term plan for some companies. More importantly, the sum assured (money your family gets if you die) of online term plans is an average of Rs.72 lakh as compared to Rs.1.47 lakh for the insurance industry in India.

 

Private insurance agents obviously don’t like the idea and neither does LIC. Hopefully, this will be buried and the whole market moves online.

Source:

  • Why the global insurance industry is wrong (LiveMint)
  • RBI plan to turn banks into insurance brokers bad idea (IndianExpress)
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