Irdai's move to limit banca biz may stifle insurance sector growth: Emkay

Any steps taken by the Insurance Regulatory and Development Authority of India (Irdai) to limit the business share of life insurance companies from the parent bank channel or bancassurance channel will be “misdirected” and stifle the growth of the sector, while not addressing the actual underlying problem of rampant mis-selling, said an Emkay Research report on Monday.

 

“…the uncertainties caused by continuously changing regulatory directions—including the ongoing bancassurance noise, the impending Insurance Amendment Bill 2024, and a likely overhaul of direct taxes in the Union Budget in February 2025—have led to the recent de-rating of the sector and will continue to weigh on listed life insurer shares,” the report said.

 

Last week, reports suggested that Irdai is likely to bring in regulations to limit the overdependence of life insurance companies on their parent banks for business sources through bank channels. Irdai is also reportedly planning to encourage diversification across multiple distribution channels to ensure balanced growth across the industry.

 

Bancassurance is a partnership between banks and insurance companies to sell insurance products through bank branches. In October 2023, Irdai formed a task force to review the existing bancassurance framework and improve its efficiency amid complaints of mis-selling or forced selling of policies.

 

Recently, both the finance minister and the Irdai chairman expressed concerns about mis-selling or forced selling of insurance products via banks and stressed the need to restore customer confidence in the system while urging lenders to focus on their core banking services.

 

“The government and regulator may be duly concerned about the mis-selling of insurance products, but the prescriptive nature of a solution is far from addressing it. Neither is insurance the only financial product being mis-sold, nor does data support that it is the banca channel that is leading the mis-selling. Using the 13th-month persistency (lapses) as the wider measure of mis-selling, data suggests a relatively better position of banca-driven private life insurers,” the report said.

 

According to the report, poor products and misaligned incentives for distributors are the underlying causes of mis-selling.

 

In H1FY25, SBI Life, which is backed by the State Bank of India (SBI), derived 60 per cent of its business from the bancassurance channel; ICICI Prudential Life Insurance, backed by ICICI Bank, received 29 per cent; and HDFC Life, backed by HDFC Bank, derived 65 per cent of its business from this channel.

 

“In actuality, once the commissions in ULIPs were rationalised, the agency distribution collapsed, and it was banca that helped in the distribution of low-cost ULIP products. Hence, there is a need to focus on continuously improving the product proposition for customers, which the regulator has been doing,” the report said.