Should Banks Run Insurance Companies?

(The Bharat Express News) - Banking and insurance have traditionally been seen as two separate pillars of the financial services industry. They have very different business models, operational priorities, and financial requirements. This has led financial services regulators around the world to separate these two sectors.

In India too, different verticals are regulated and controlled independently. However, the large banks, by virtue of their large shareholding structure and their presence on the board of directors, exercise significant, if not absolute, control over several insurance companies. The RBI has proposed reducing the banks’ stake in insurance companies, but have these measures produced the desired results?

Insurance and banking are basically two different activities. Insurance is a “long-term” business in which companies have to wait long periods of time to break even and make a profit. The capital is blocked for longer cycles than the bank. If banks get deeply involved in insurance business, their focus on lending and other banking activities would be seriously affected as insurance cash flow cycles may not be conducive to banks’ needs. The liquidity requirements of the two areas are radically different. This conflict of objectives could potentially have an impact on the ability of insurers to make optimal investment and cash flow management decisions.

The main reason that the regulations clearly impose a separation between banking, capital markets and insurance is to create a separate niche for each sub-vertical of the financial services industry and allow them to operate independently and freely. . Encouraging the independence of sub-verticals would ensure a stronger financial services industry, as each branch can complement each other to provide services to the client.

In addition to holding stakes in joint ventures and other insurance entities, banks are also an important insurance sales channel. This creates a binding structure where the sales channel belongs to the banks themselves. This could undermine the equality of opportunity that other competing channels would expect to obtain. Bancassurance is a channel where pressure points can be generated for business acquisition. For example, the bank granting the loans has a great influence on where the corresponding asset is insured. The bank providing the credit serves as the channel providing the insurance and also the owner of the insurer who provides the risk coverage. The entity applying for credit is often deprived of the freedom to choose the insurance service provider and the purchasing channel. In addition, it is often observed that, as a lender, the Bank’s interest in insuring is limited only to the extent of financing and that problems arising from “underinsurance” put the insured at risk. / higher financial losses. In the past, the insurance regulator had tried to free the distribution of insurance from the clutches of the Bank’s control by imposing at least three mergers each in the Life, IM and Health sectors. However, only 3.6% of insurers complied with these rules as of March 2020. Most of the regional rural banks, which are expected to help improve insurance penetration in rural India, are still continuing with a single link. insurance in LI & GI, it goes without saying with insurers promoted by their own parent bank. Such practices are not healthy and conducive to the development of the Indian insurance market.

This naturally leads to the question whether limiting the ability of banks to finance insurance companies would create a capital shortage. This is unlikely to be the case as regulations gradually move towards higher limits for foreign investment in the insurance industry. The potential of the Indian insurance market is well known. The use of FDI is still low and we have a clear opportunity to expand it. The inflow of FDI has not been as large as expected and FDI in insurance equity is extremely low at 2.36% of total FDI in the services sector in March 2020. We can attribute this to the expectation approach of many foreigners. actors or unease with the implementation of regulations and the market. Proactive steps to demonstrate the ease of doing business and the supportive regulatory structure we can provide would provide the necessary incentive to attract investment abroad. Either way, these problems would fade over time and foreign investment would have to come sooner rather than later.

Overall, maintaining the separation between banking and insurance with adequate ease for the entities to work together smoothly should go a long way in strengthening and developing India’s insurance industry. The level playing field that this would provide will also be a factor that could attract more foreign investment.

By Siddharth Acharya

The author is a practicing lawyer in banking and insurance law. The opinions expressed are his own.


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