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Bank (Bancassurance) vs Insurance Broker

As part of growth many Business would take Over Draft or line of credit or loan from a Bank. As part of the credit due diligence to protect their interest or to achieve their internal cross-sell insurance targets, the bank would take Insurance Cover for the client.

RBI in its circular (DBOD.No.FSD.BC.60/24.01.001/2009-10) prohibits banks from adopting any restrictive practice of forcing its customer to go in only for a particular insurance company in respect of assets financed by the bank. The customer of the bank should be allowed to exercise their own choice and the participation by the bank's customer in insurance product through the bank is purely on a voluntary basis. There shouldn't be any linkage either direct or indirect between the provision of banking services offered by the bank to its customers and use of the insurance products. 

As the Bank is a Corporate Agent of the insurance company, apart from all the points we discussed previously about the disadvantage of Agent in comparison of Insurance Broker are applicable; the following bank specific disadvantage one should look out to

  1. Bank deals with money management and not risk management, hence they would not have in house insurance expertise required to do your Risk Management.

  2. Usually bank covers only to the extent of their exposure (i.e Overdraft, Loan etc) irrespective of the value of your assets. This leads to underinsurance at the time of the claim settlement. E.g. your property is worth 10cr & you’ve 5cr OD; Bank would take fire insurance policy for 5cr which is its exposure. So, you end up insuring 10cr property for 5cr (50% of its value). In the event of fire accident where you claim a loss of 20Lacs (on policy of 5cr), the insurance company would pay you 50% of the claimed amount as the property is underinsured.

  3. There is absolutely no room for negotiation with the bank on premium, hence they would be far more expensive than what the broker would do.

  4. Usually the insurance cover is taken during the process of the loan. Client’s needs to take extra care during take-over of the loan from one bank to another in between the policy period where the last bank wouldn’t renew the policy and the new bank may or may not remember to renew it later.