Bancassurance Relationship   – How enforceable are the guidelines?

Banking here! Insurance there! The two come together to give birth to ‘Bancassurance’. Thus, Bancassurance is an arrangement between a bank and an insurance company whereby the insurance company uses the bank’s branches as the channel to sell its products to the bank’s customers. The mutual relationship enables the bank to create a one-stop shop for its customers through which it earns additional income. The benefit to the insurance company is that it increases its customer base without necessarily increasing direct sales outlets, which come with a relatively higher cost.

This partnership is not only convenient for customers to subscribe to insurance products at their banks, but also helps them to save time and cost involved in dealing with the companies separately. Having seen the increasing need for insurance companies to sell their products and services at bank branches, the National Insurance Commission (NIC), which is the regulator of the insurance industry, came out with guidelines for the registration of banks which are desirous to act as corporate agents. As the principal, the insurance company must initially present to the Commission a partnering bank to obtain the corporate agency licence.

Indeed, some of the banks offering Bancassurance products to the public belong to financial holding companies with subsidiaries dealing in pensions, investments and insurance. Since these companies are owned by persons with significant shareholdings across the board, there is a tacit agreement that facilitates a business relationship with the affiliates. What then are the Bancassurance nuances in these related entities?

The Guideline(s)

One of the Bancassurance guidelines states that a bank shall not induce or compel in any form, a prospect to buy an insurance product of its principal. All prospects, including staff of the bank, should be allowed to decide out of their own volition which insurance product they wish to buy and from which insurance company”.

Basic understanding of inducement and compulsion comes in handy to appreciate the dynamics of the Bancassurance relationship between the companies. The Law Dictionary clearly states that the benefit or advantage which the promisor is to receive from a contract is the inducement for making it”. To compel in the context of the guideline(s), as I understand it, means that an individual is made to sign onto an insurance product with an insurer against their free will when other alternative insurers are available. 

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The practical reality is that when a bank and an insurance company agree on a bancassurance (principal and agent) contract, the bank accepts proposals regarding the products (life or non-life insurance), premium charges(prices) and the earnable commissions. To create a marketing tool for the bank acting as its corporate agent in a competitive industry, the usual practice has been that the (principal) insurance company offers favourable terms and conditions for their mutual gain.

The connected fact is that when we compare unrelated companies to holding companies, the latter tends to explore the advantages of economies of scale and thereby establish pricing mechanisms which may not be markedly different but are better than those of the former. This, therefore, places the bank in an advantageous position to persuade prospects to buy its principal’s insurance products – hence, it stands to reap thereafter the attendant benefits it had promised. We can think of the case when a bank decides to give consideration to prospective loan applicants who agree to buy insurance products of its principal with favourable loan rates. In this circumstance, there is an element of inducement – whether latent or visible – with enforceability challenges.

In my appreciation of the directive(s), a bank acting as a corporate agent can solicit for businesses but the decision to buy insurance policies is to be made by the customers of their own free will. Nonetheless, there are some credit transactions which necessitate the bank to require borrowers to provide insurance policies as the condition precedent to mitigate the inherent credit risks.

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At its behest, the bank asks prospective borrowers to underwrite the loan protection policies at the insurance company it deems fit. The burning fact is that the prospective borrowers are denied the opportunity to contact other insurers in situations where the bank has an existing Bancassurance relationship. Be it administrative convenience or otherwise, the practice compromises the customers’ volition as stipulated in the directive.

Interestingly, when a bank is acting as a corporate agent, its employees also find themselves in the conundrum. Considering them as internal customers, they are treated like external customers when they apply for mortgage loans, car loans which need insurance cover to protect them. With the Bancassurance arrangement in place, the staff have no other option but to underwrite with the bank’s principal insurer. This phenomenon is more prevalent in related companies than the unrelated ones; even though the motivation behind this culture is to make the purchase of such insurance products convenient for staff, it however to my mind flouts the directive.

Concluding Remarks

From my point of view, the intention behind the Bancassurance Directives is to promote fair market practices. But the other side of the issue is that owners of banks with insurance subsidiaries have established an umbilical cord between the companies and find it prudent to refer the banks’ needs to the insurance wing. Hence, with the existence of a Bancassurance relationship, it will be difficult if not impossible to enforce the directive concerning inducement or compulsion – be it real or imagined. In that respect, what should attract the regulator’s attention must be how the companies promote good corporate governance while it focusses on modalities to handle transfer-pricing within the related (holding) entities.

Dear readers, I am once again grateful for your valuable time. Your views are always welcome. Keep reading. God is with You!

The writer is a Chartered Banker


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