Representational image showing a form for health coverage. PHOTO: REUTERS
If anyone intends to draw a parallel of the veracity of what was spoken by this philosopher, he needs to look no further than insurance distribution being done by banks ie bancassurance.
A few days ago, the top management of an insurance company was fined. Though the fine is paltry considering the wages of the top management, it is nonetheless a symbolic gesture that speaks volumes about the gross, intentional or unintentional oversight.
I had attempted to highlight the critical lacunae that were left out in the bancassurance guidelines issued by the Securities and Exchange Commission of Pakistan (SECP) in 2015. It was evident that the regulations were introduced without considering the long-term impact on the industry and consumers.
As I have been part of the bancassurance channel, it is with some privilege I can say the course of action that could be adopted as remedy, will be swift and aimed at the lower echelons of the company as it is often the case in the corporate world. It would most likely be the bancassurance sales consultant who initiated this sale to the call centre representative who verified the sale will be let go, if they haven’t been already.
In this entire episode, the insurance company will assume entire financial and reputational consequence as the business demands it and it cannot risk invoking the wrath of the distributing bank, which can then resort to partner with another insurance company.
The products that are offered in the life assurance industry are almost identical with allocations and benefits being the same. In most of the cases, the returns to the customers are in the same range as well.
This gives the bank the luxury to unilaterally decide the partner it chooses and continues with and makes the insurance company susceptible, vulnerable and easily dispensable.
So, what happens to the customers who have their insurance policies with the divorced company?
According to the SECP regulation, the insurance company would need to then collect any anniversary renewal premiums by themselves, while the customer will continue his banking with the same bank that initially sold him the insurance policy.
It raises the very important question - then why insurance companies persist with this channel. Clearly it is not aimed at facilitating customers, it is a channel that facilitates customer acquisition, the insurance company takes the ride as it benefits it the most.
It is very interesting to note that an insurance company that partners with one of the largest banks has become largest premium acquirer and its profitability has skyrocketed. A closer look reveals the reason for this sky-high profitability, which is the lowest first-year allocation for the customers, in simple words.
On the other end of the spectrum, the senior management at banks is quite content with the minimal regulatory control the State Bank of Pakistan (SBP) has with regard to the third-party products.
It provides the banks with a perfect alibi to present to the SBP when any complaints surface, that the banks are mere distributors of the product and their liability is only limited to introducing the product to the customer with all its positive and negative covenants.
The banks seem to have the cake and eat it too in this case. In theory and on paper, the regulations provide the opportunity for a transparent transaction. Yet, it is this lapse in regulations that has created an undue tilt towards adoption of the referral model.
This model for all its vices allows banks to commit very less resources, especially in developing people for insurance sales. It relies squarely on insurance company representatives who are paid a trivial salary that is anywhere between Rs14,000 and Rs25,000 to sell and conclude the transaction.
Though in reality, the customer is cajoled by the bank staff and at the very last instance the insurance company representative reads the fine print to the customer.
This enables the bank salespeople to transfer all the liability of mis-selling to the insurance company representative that is deputed by the insurance company in the branch premises. If the customer ever complaints, the insurance company representative takes the fall and the bank and its staff remains protected.
This has reduced the bankers who are selling insurance products to glorified bandits, not by their own fault, but due to the inherent flaw in the referral structure.
Though it is very well-articulated and documented, insurance is sold and not bought, the bankers are obliged to use their relationships with clients to sell insurance products to customers and convince them that what is essentially on paper is tentative and actual return that will accrue to the customer at the end of the investment period will be far greater and is comparable to the returns on National Savings Schemes.
The customer due to his trust and relationship follows through and acquiesces in subsequent verification steps (callback verification), only to find out five years later that the actual return is way less than what was promised.
He feels hoodwinked by the low return on his savings. Moreover, the banker who sold him the product has left the bank for other greener pastures.
Today, we are witnessing the gradual decay of this once-promising channel of bancassurance that could have proven to be the most effective for increasing insurance penetration into the under-insured population.
Yet, we have managed to squander another brilliant opportunity for spreading financial products through an ineffective policy and regulatory framework that was put in without any strategic vision and direction.
In this meaningful context, the SECP and SBP must work together and ensure collective surveillance of bancassurance and bancatakaful sales.
The SECP should issue stringent guidelines to insurance companies to pay reasonable salary, set up licensing requirements and establish an institution along the lines of NIBAF (SBP) for proper training and licensing. This is absolutely critical for the propagation of insurance and protection of consumers.
The writer is a Canada-based progressive agriculturist and former banker
Published in The Express Tribune, February 10th, 2020.
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