KOCHI: While debates around bancassurance dominate regulatory discussions, industry experts emphasise the need for India’s insurance sector to address deeper systemic challenges.
“From misaligned incentives to outdated health insurance frameworks, these foundational issues require urgent regulatory intervention to unlock the industry’s potential,” said an insurance expert, who returned from overseas recently, while talking to businessbenchmark.news.
India’s insurance industry is still grappling with a low insurance penetration that hovers around 4 per cent, much lower than many of the developed and even emerging markets. The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), has been actively exploring ways to address systemic inefficiencies and improve industry practices.
However, the sector continues to grapple with issues such as mis-selling, particularly through the bancassurance channel, which remains a significant concern. Banks have always been too eager to encourage the bancassurance business as it adds subsntatially to thier non-interest income.
Health Insurance
One critical gap lies in the design of health insurance policies, which often demand hospitalisation to process claims. This approach disregards the rising trend of outpatient and daycare treatments, leaving policyholders frustrated and underserved. “Reforming claims eligibility criteria to accommodate modern medical practices could make health insurance more relevant and consumer-friendly,” experts argue.
Auto insurance
India’s auto insurance system deviates significantly from global norms, where the at-fault driver’s insurer typically pays claims. Instead, the insurer of the damaged vehicle bears the cost here, leading to inflated premiums and reduced accountability for reckless driving. Aligning with international standards could incentivise safer driving and distribute risk more equitably.
Beyond bancassurance, mis-selling is rampant in auto and health insurance due to flawed practices and systemic inefficiencies. For example, auto dealerships, acting as Motor Insurance Service Providers (MISPs), often pressure vehicle buyers into purchasing overpriced policies, limiting consumer choice and transparency.
Regulatory intervention to curb such “tie-in sales” could ensure fairer deals for customers. This gains significance in the context that Indian auto industry is going through one of its best growth phases in history.
Revisiting bancassurance
While IRDAI has proposed limiting life insurers’ reliance on bancassurance to address over-reliance and mis-selling, some experts argue that these measures are misdirected.
Bancassurance remains a vital distribution channel, with major players like SBI Life (60 per cent), HDFC Life (65 per cent), and ICICI Prudential Life (29 per cent) deriving substantial portions of their business from it in H1FY25. The real issue lies in misaligned distributor incentives and poorly designed products, not the channel itself.
Reducing reliance on bancassurance must go hand-in-hand with promoting alternative distribution channels. e-commerce platforms and direct digital channels are underutilised. Encouraging innovation in these areas could mitigate mis-selling and foster balanced growth.
Addressing root causes
Misaligned incentives and poor product design remain the underlying causes of mis-selling. High distributor commissions and complex policy terms often result in policies being sold without regard for customer needs.
Linking commissions to persistency rates could ensure that distributors prioritise long-term value over immediate gains. The insurance sector also faces uncertainties such as the impending Insurance Amendment Bill 2024 and a potential overhaul of direct taxes in the Union Budget 2025.
While IRDAI’s proposed measures aim to address immediate issues, a comprehensive approach is essential to resolve the sector’s deep-rooted challenges. From reforming health and auto insurance practices to fostering innovation in distribution, the focus must shift to systemic improvements that will drive sustainable growth and enhance consumer trust.
