U Recommendation and the future of bancassurance
Autor: Piotr Czublun
After several months of anticipation, on 30th December 2013 the proposal of “U recommendation” on good bancassurance practices from the Financial Supervision Commission finally came to light. The recommendations – there are 22 of them overall – are the regulator’s answer to the long awaited regulation of the market, where banks offer insurance products. There was much speculation on the possible scope of the regulation, but probably no one had foreseen what was finally presented.
Apart from the obvious requirements, like greater access to information on insurance products offered, many concerns have been raised because of unclear provisions on the limitation of a bank’s possibility to make profits on insurance products offered in the group insurance model ( in such model there is only one insurance agreement between a bank and an insurance company and insurance coverage is granted for several clients of the bank). According to one recommendation, charges made by a bank cannot exceed the costs incurred by the bank when handling an insurance agreement. In practical terms, this may result in the necessity of offering insurance products without any profit.
On the other hand, expanding the scope of information provided to the client – although very important in general – can bring a different result than intended – even greater misinformation. What else can be expected when handing to the client detailed information on: his rights and obligations, the general terms and conditions of insurance, the specific terms of insurance, group insurance agreement, information on the minimum acceptable scope of coverage, comparison of similar insurance products obtainable on the market, product’s card, explanation of all the costs incurred by the client , etc? Surely there will not be many people who will go through all these documents, and even fewer who will do that with complete understanding – but, nevertheless “the bank shall use its best efforts to ensure that the client understands their rights and obligations”.
It is certain that the goal – which is an improvement of the scope and transparency of information provided to the client – can be achieved by e.g. making the general terms and conditions of insurance more precise, or by introducing a short “insurance card” containing all the key information concerning the insurance (this information could for example cover only the scope of insurance, the insurance sum, the amount of charges for coverage/premiums and exemptions/limitations of liability of the insurance company). Other information, such as the details of claim handling procedures – although important – are not really essential in the course of choosing a particular insurance product by the bank’s client. It would not be a problem to present this additional information among the insurance conditions only.
Another very important factor of the projected recommendations is the significant increase of costs associated with handling banks’ insurance projects. Apart from the increased costs of preparation and printing of additional materials, they will have to prepare constantly a comparison of products and offers available on the market. The banks should also monitor the amount of insurance companies’ refusals in the claims handling process and analyze the justifications of these decisions. All these actions will require contracting another high level specialist – and someone will have to pay for their work.
Additionally, these Recommendations U strongly recommend the limitation of “the strong dependency of employees’ remuneration being strictly based on the number of bancassurance products sold”, i.e. commission based remuneration. In NRA’s opinion it should cause a reduction in cases of misseling i.e. offering insurance products which are inappropriate to the needs of a client and/or their financial possibilities. This can cause a problem of motivation. How can banks encourage their employees to properly meet their responsibilities, if such recommendations reduce employees financial potential earnings. So, realistically, does a client without access to a financial advisor better choose their own insurance products, its scope and insurer? It is interesting to note that this recommended limitation of dependency of an employees’ remuneration on their sales results affects only banks, whereas the remainder of the intermediary market, not only insurance is exempt from this. Why is it only banks that have to be restricted from rewarding their employees on a commission bases?
At the moment it is difficult to estimate the effects of this intended recommendation. We can however be certain that after its implementation bank clients will, at least theoretically, be much better informed (in reality probably the majority of clients will not read all the information that they have received). At the same time clients may pay more for insurance coverage because the overall costs for banks of providing bancassurance products and the amount of insurance premium will significantly increase.
It is also very likely that banks income from such products will dramatically decrease, because on the one hand the costs borne by the clients when purchasing group insurance should not exceed the real costs of providing the services by the bank, and on the other hand the amount of the insurance products offered by the banks should be limited. As a consequence we can also expect a dramatic decrease in income for insurers from this distribution channel. Additionally, we can expect a large decrease in the amount of staff employed in the bancassurance sector (both by insurers and banks), especially employees engaged in direct sales of insurance products.