Bancassurance in India: Are Banks Earning Too Much from Related-Party Commissions?

Introduction: A Wake-Up Call for Indian Bancassurance

If you’ve ever bought insurance through your bank, you might think your advisor is guiding you purely in your interest. But recent reviews of filings from the Insurance Regulatory and Development Authority of India (IRDAI) and corporate disclosures reveal a more complicated picture.

Some Indian banks are earning nearly 100% of their insurance commissions from insurers within their own corporate groups. This revelation has sparked fresh debates on conflict of interest, product suitability, and consumer protection in bancassurance—the practice of selling insurance through bank channels.

With banks dominating insurance distribution, especially in semi-urban and rural areas, these issues matter not just for regulators and policymakers but also for everyday customers seeking financial security.

 

Understanding Related-Party Commissions

What Are Related-Party Commissions?

Simply put, a related-party commission arises when a bank sells insurance products issued by a company it’s closely linked with—usually via common ownership or group affiliation.

For example:

• A bank selling life insurance from its own insurance subsidiary earns a commission from a related entity rather than an independent insurer.

Are Related-Party Commissions Illegal?

Not at all. Under the Companies Act and accounting standards, such transactions are legal as long as they are:

• Transparent
• Conducted at arm’s length
• Fully disclosed in filings

However, concerns arise when related-party commissions dominate a bank’s insurance earnings, potentially leading to biased recommendations and limiting customer choice.

Why this matters: Customers may miss out on better deals or products suited to their unique needs. In other words, legality does not always equal fairness.

 

Regulatory Framework Governing Bancassurance

India’s insurance sector is highly regulated, with multiple rules ensuring transparency and protecting consumers. Key frameworks include:

1. IRDAI (Payment of Commission) Regulations, 2023

• Requires each insurer to adopt a board-approved commission policy
• Mandates full disclosure of commissions to maintain transparency

2. Master Circular on Expenses of Management (2024)

• Sets limits on distribution expenses
• Ensures payments to corporate agents, including banks, comply with prudential norms

3. Corporate Agent Regulations, 2015

• Requires banks to disclose all remuneration from insurers
• Banks must file details of new and existing contracts for regulatory oversight

Despite these rules, recent filings suggest potential blind spots, especially where related-party transactions make up the bulk of a bank’s commission income.

 

Why This Issue Matters

Bancassurance is no small business. Major banks interact with millions of customers daily, making them highly influential in financial product recommendations. But when financial incentives favor certain products, impartiality can be compromised.

Key Concerns

1. Consumer Protection:
• Customers may be nudged toward high-commission products rather than policies that best suit their needs.
2. Market Fairness:
• Independent insurers without banking networks might struggle to compete, stifling competition and innovation.
3. Trust and Penetration:
• Biased distribution may slow down India’s efforts to increase insurance penetration, currently around 4% of GDP.

 

Disclosures and What They Reveal

Recent IRDAI filings and analyses by platforms like 1 Finance show striking trends:

• A major private bank earned 100% of its life insurance commissions from its in-house insurer.
• In mutual funds, over 99% of commission income came from the bank’s asset management arm.

While not universal across all banks, the concentration is high enough to attract regulatory attention, highlighting a potential systemic bias in distribution practices.

 

Reactions from Industry and Experts

Industry Perspective

Banks argue that exclusive arrangements streamline operations, improve customer service, and reduce operational costs.

Expert Opinion

Dr. Sharad Menon, former insurance regulator, explains:

“Banks distributing their group’s products walk a fine line. It’s not illegal, but ethically tricky. Without transparency and caps, the credibility of bancassurance could suffer.”

Consumer Advocates

• Exclusive tie-ups may simplify operations, but reduce consumer choice
• Customers often remain unaware of commissions earned by banks

 

Conflict vs. Convenience: The Core Debate

Banks claim that group partnerships improve efficiency, but critics warn of conflicts of interest:

Bank Argument	Critic Argument
Integrated products lead to faster approvals and consistent service	Incentives may bias advisors, limiting better options for consumers
Simplifies operational process	Customers may not know about lower-cost or higher-benefit alternatives

Transparency is crucial to ensuring that efficiency does not cross into exploitation.

 

IRDAI’s Regulatory Response and Proposed Reforms

The IRDAI has proposed measures to make bancassurance more transparent and consumer-friendly:

• Commission Caps: First-year life insurance at 20%, renewal at 10%
• General & Health Insurance: Rationalized commissions (~15%)
• Total Expense Ratio (TER): Limit distribution costs like mutual funds
• Restricting Partnerships: Prevent over-concentration of insurers in a single bank
• Fee-Based Models: Transition from commission-heavy to advisory models

Challenges: Implementation is tricky. Banks resist full disclosure, fearing rebate requests from customers, which may violate anti-rebate rules.

 

Financial Impact: Who Wins and Who Risks

Stakeholder	Likely Gains	Potential Risks
Banks	Stable income, operational synergy	Reputation risk, regulatory scrutiny
Group Insurers / AMCs	Guaranteed distribution, lower marketing costs	Oversight pressure, margin pressure
Consumers	Simplified service	Mis-selling risk, limited choices
Independent Insurers	Could benefit from fair reforms	Market access challenges
Regulators	Enforce governance	Pushback from institutions

Clearly, banks and their affiliates gain short-term profits, but consumer trust and market integrity are at stake.

 

Practical Implications for Stakeholders

For Banks and Insurers

• Revisit distribution strategies
• Strengthen monitoring of related-party transactions
• Ensure transparent, board-approved commission policies
• Prepare for tighter margins if TER-like models or caps are enforced

For Consumers

• Benefit from clearer commission disclosure
• Compare policies across insurers rather than accepting the first offer
• Awareness can prevent being steered into unsuitable products

For Auditors and Controllers

• Examine Related Party Transaction (RPT) disclosures carefully
• Ensure compliance with Ind AS 24
• Non-compliance may trigger audit qualifications or regulatory penalties

 

Common Misconceptions

1. “100% related-party commissions mean fraud.”
• Not necessarily. Legal if transparent and disclosed.
2. “Caps alone prevent mis-selling.”
• Caps help, but ethical practices and disclosure are equally critical.
3. “Only life insurance is affected.”
• The issue spans life, health, general insurance, and mutual funds.
4. “Customers already know commissions.”
• Most remain unaware unless they dig into filings or statements.
5. “Independent insurers lose out.”
• Proper reforms could level the playing field and increase market access.

 

The Numbers Behind the Debate

• FY2023–24: Top 15 Indian banks earned ₹21,700 crore+ in insurance and mutual fund commissions.
• A significant portion came from internal subsidiaries.
• While profitable for banks, it raises concerns about market concentration and transparency.

 

The Regulatory Balancing Act

IRDAI faces a delicate task:

• Encourage financial innovation and bancassurance growth
• Protect consumers from biased advice
• Monitor related-party transactions to maintain fairness

The Master Circular on Expenses of Management now mandates disclosure of all commission and marketing expenses. Enforcement, however, varies across institutions.

 

Industry Voices and the Future Outlook

• Banks are re-evaluating bancassurance models to comply with upcoming reforms.
• Co-branded and open architecture platforms are being explored to allow multiple insurers per bank.
• Financial literacy campaigns are empowering consumers to ask about commissions and make informed choices.

If executed well, India could develop a transparent, advisor-driven model akin to mature insurance markets.

 

Broader Economic Implications

• Bias in bancassurance can erode trust, slowing insurance adoption.
• Reduced non-interest income due to capped commissions may lead banks to raise service fees or bundle products, which regulators must monitor.
• Sustainable reforms could increase insurance penetration while retaining public trust in banks.

 

Practical Steps Consumers Can Take

1. Ask for Transparency – Request commission breakdowns for each policy
2. Compare Products – Use online comparison tools or independent advisors
3. Avoid Tied Sales – Decline policies linked to loans or products
4. Engage Regulators – Report suspected unfair practices to IRDAI
5. Stay Informed – Follow IRDAI circulars and industry news

Even while reforms roll out, these steps give consumers more control over their financial decisions.

 

Expert Analysis

Financial experts agree that the problem isn’t commissions but opacity. Key takeaways:

• Transparency builds trust: Customers can make informed choices
• Hidden incentives drive short-term sales, hurting long-term satisfaction
• Dr. Menon:

“We don’t need to outlaw commissions; we need to make them visible. The sunlight of disclosure is the best disinfectant.”

 

Conclusion: A Turning Point for Bancassurance

The revelation that some banks earn up to 100% of commissions from related parties is more than a statistic—it’s a wake-up call.

• Regulators: Must enforce disclosure and cap rules rigorously
• Banks: Need to prioritize transparency over short-term profit
• Consumers: Must demand clarity and exercise informed choice

Potential structural reforms include:

• Commission caps modeled on TER
• Mandatory disclosure on policy documents
• Transition to advisory or fee-based models
• Stronger audit and compliance oversight

India’s bancassurance sector is at a crossroads. Success means a trustworthy, transparent distribution system; failure risks eroding customer confidence—a cost far higher than any lost commission.

 

References / Source Links

• IRDAI (Payment of Commission) Regulations, 2023
• IRDAI Master Circular on Expenses of Management, 2024
• Insurance Act, 1938
• Axis Bank Annual Report (Commission Disclosures)
• 1 Finance and Moneylife analyses
• Public IRDAI and RBI filings