Should banks manage insurance companies?
“Maintaining the separation between banking and insurance with adequate facilities for the entities to work together smoothly is expected to go a long way in strengthening and developing the Indian insurance industry.”
By Siddharth Acharya.
Banking and insurance are traditionally seen as two separate pillars of the financial services industry. They have very different business models, operating priorities and financial needs. This has led financial services regulators around the world to separate these two industries. In India too, different verticals are independently regulated and monitored. However, the big banks, through their large shareholding and their presence on the board of directors, exercise significant, if not absolute, control over several insurance companies. RBI has proposed to reduce banks’ stake in insurance companies, but have these measures yielded the desired results?
Insurance and banking are basically two different businesses. Insurance is a “long-term” business in which companies have to wait for long periods of time to break even and make a profit. Capital is locked in for longer cycles than the bank. If banks become deeply involved in insurance business, their focus on lending and other banking activities would be seriously affected as insurance cash cycles may not be conducive to banks’ needs. The liquidity requirements of the two areas are radically different. This conflict of objectives could potentially impact insurers’ ability to make optimal investment and cash flow management decisions.
The main reason why the regulations clearly impose a separation between banking, capital markets and insurance is to create a distinct 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 sector, as each branch can complement each other in providing services to the client.
In addition to holding stakes in joint ventures and other insurance entities, banks are also an important channel for selling insurance. This creates a binding structure in which the sales channel belongs to the banks themselves. This could undermine the level playing field that other competing chains would expect to get. Bancassurance is a channel where pressure points can be generated for supply. For example, the bank granting loans has a say in where the corresponding asset is insured. The bank providing the credit serves as the channel providing the insurance and also as the owner of the insurer providing the risk coverage. The entity seeking credit is often deprived of the freedom to choose the insurance service provider and the purchasing channel. Moreover, it is often observed that as a lender, the Bank’s interest in insuring is limited only to the extent of the financing and that problems arising from “underinsurance” expose the insured to a higher risk / to financial losses. In the past, the insurance regulator had attempted to free insurance distribution from the clutches of the Bank’s control by imposing a minimum of three reconciliations each in Life, IG and Health. However, only 3.6% of insurers have complied with these rules as of March 2020. Most regional rural banks, which are expected to help improve insurance penetration in rural India, continue with a single bond of insurance in LI & GI, it goes without saying. with insurers promoted by their own parent bank. Such practices are not sound 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 shortage of capital. This is unlikely to be the case as regulation gradually moves towards higher limits for foreign investment in the insurance industry. The potential of the Indian insurance market is well known. The use of the IDE is still low and we clearly have the possibility of developing it. FDI inflow has not been as strong as expected and FDI in insurance equity is extremely low at 2.36% of overall FDI in the services sector in March 2020. We We can attribute this either to the wait-and-see approach of many countries abroad. actors or unease with the regulations and the market put in place. Proactive measures to demonstrate the ease of doing business and the supporting regulatory structure that we can provide would provide the necessary incentive to attract foreign investment. In any case, these problems would disappear with time and foreign investment should arrive sooner rather than later.
Overall, maintaining the separation between banking and insurance with adequate facilities for the entities to work together smoothly is expected to go a long way in strengthening and developing the Indian insurance industry. The level playing field this would provide will also be a factor that could attract more foreign investment.
The author is a lawyer in banking and insurance law. The opinions expressed are his own.)
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